A ‘cooling-off period’ requirement for mortgage lending will be introduced into national law in EU member states by March 2016 as part of the Mortgage Credit Directive.
In practice that means introducing either a ‘reflection period’ of not less than seven days before contract signature, or a right of withdrawal for not less than seven days following contract signature. States could implement a combination of both.
The move is intended to encourage more cautious and appropriate borrowing and less of the risk-taking associated with the 2008 global financial crash.
It looks sensible enough on the surface, but can there be genuine cooling off when it comes to moving home?
We’re used to cooling-off periods on many everyday purchases. They’re important because they allow emotionally charged, ‘hot’ psychological states to subside. Post-purchase, you can learn quickly about the product through direct experience, free from the pressures and emotions which prevailed at initial purchase. With home buying it’s a far more complex picture.
Mortgage contracts aren’t ‘experience goods’ in a conventional sense, at least not within a few weeks or months after the signature. But homes certainly are. So there are hot, emotional choices and feelings about a new home that trigger the need for a mortgage contract, which is a hurdle to be negotiated on the pathway to home ownership.
If a cooling-off period is implemented after the mortgage contract, then it’s possible that the right of withdrawal is exercised for the wrong reasons.
A likely scenario is that the mortgagee gains access to the property, learns more about it, and sees a few glitches in the dream. The decision to pull out will have nothing to do with any sober reconsideration of the mortgage contract.
If there’s a reflection period before the mortgage signature, then what really happens? The prospective homebuyer is still in a hot state of wanting the new home, yet she hasn’t learnt anything new about the mortgage contract. It’s still seen as a barrier to getting what they want. In England, the tension and uncertainty only subsides once contracts are exchanged.
What’s needed for a truly effective cooling-off period is information, transparency, and an opportunity for other providers to see what’s been offered and to provide something cheaper or more suitable for the buyer’s situation - in other words, for finance ‘gazumping’.
Exploring alternative options requires effort, opportunity cost, and the willingness to have other mortgage providers run additional credit-report searches, which can affect the consumer’s credit score.
Without an element of active competition and leaving all the work solely up to the buyer, the period of reflection is just a period of waiting.
Dr Kim Kaivanto is lecturer in economics at Lancaster University Management School
