The Mortgage Credit Directive and Bridging Finance
The Mortgage Credit Directive proposed by the European Commission came into effect on 21st March 2016. The Directive places tighter controls on credit agreements for consumers in relation to residential immovable property.
This means that firms offering second charge mortgage loans are under greater scrutiny. For example, they are now required to hold the correct mortgage permissions and must be authorised to conduct certain regulated activities.
The Directive stipulates that certain conditions are met by lenders, such as: customers should be treated fairly at all times, the advertising of products must not be misleading in any way, with standard information regarding rates being included in all advertising materials, and that all requisite information regarding a proposed contract is provided to the consumer ahead of the contract being finalised.
How the Directive Affects Bridging Finance Lenders
Most importantly, lenders now need to be careful that their loans are classified correctly and specifically that unregulated lenders are not putting regulated loans in place.
Bridging loans in excess of 12 months in length may fall under the remit of the Mortgage Credit Directive. Such loans may now be regulated according to the specifications of the Directive and the borrower should be issued with the European Standardised Information Sheet. For example a loan secured on an office building to purchase a family home would fall within the remit of the Directive and would be considered as an Article 3(1)(b) loan which would be governed by MCOB 14.
The Directive can be seen as a positive move forward for the bridging finance industry as it could help to increase transparency, standardisation and, ultimately, customer satisfaction. For this to happen, bridging finance lenders need to be well-informed as regards the Directive and maintain practices that are in compliance with the Directive, in order to operate fairly and legally.
The Government did seek to minimise the impact of the Directive in certain instances. The then existing consumer credit regime allowed for certain regulatory exemptions for second charge mortgage lending. The Government aimed to maintain these exemptions where the Mortgage Credit Directive allowed for it. For example, a second charge business loan in excess of £25,000 on a home. All lenders should take time to fully understand the Directive and the significant impact it now has on the UK mortgage market.
Consumer Buy-to-Let Loans and Buy-to-Let Loans
Consumer buy-to-let loans can only be used where the security is a sole rental property, that is not rented to a related individual and you are what has become known as the “accidental landlord”. For example, when someone wishes to use a property as security which was purchased and they used to live in, when individuals intend to use a property as security which has been gifted, or when inherited property is used as security.
Buy-to-let mortgages make up a significant amount of the UK mortgage market.
Previous legislation stated that at least 40% of the property must be occupied, by the borrower or a relative, in order for the mortgage to be regulated. The previous legislation was implemented in order to show a distinction between mortgage lending to owner-occupiers and to buy-to-let landlords. This was done to ensure that buy-to-let landlords were not brought within the scope of regulation. This step was taken to protect the owner-occupier’s home from risk and to acknowledge that buy-to-let borrowers typically act as a business.
The Government aimed to implement the new regulations only where there was a clear case for doing so. Despite this, the scope of the Mortgage Credit Directive was broader than the existing UK regulation and addressed all mortgage lending to consumers.
However, the Directive does acknowledge that buy-to-let lending differs significantly from lending to individuals who are buying their own home. Therefore, member states were provided with the option to exempt buy-to-let mortgages from the Directive. The Government opted to do so apart from creating the now regulated consumer buy-to-let loan.
Assistance with Bridging Finance
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