Given the wealth of foreign nationals residing in the UK, high percentage of foreign companies, and sheer amount of Brits posted abroad with their employers, it is no wonder that a large proportion of our client base either has income or assets derived in a foreign currency.
The European Mortgage Credit Directive (EMCD) is a new set of conduct rules and guidelines from the European Parliament, supported by the Financial Conduct Authority (FCA), due to come into force on 21 March 2016. EMCD has two key aims; to provide a high level of consumer protection, and to create greater cross border competition for mortgages across the European Union.
The EMCD essentially mirrors much of that which was introduced under the Mortgage Market Review (MMR), announced in April 2014 by the FCA. There are, however, areas within the EMCD which require UK lenders and intermediaries to adapt their current processes, systems, and lending criteria.
As previously stood, a generous handful of high street lenders were able to accept foreign income within their policy. Some of these lenders have now backed out altogether, whereas some others have imposed stricter qualifying criteria, leaving just a pinch of viable mainstream options within this arena.
For instance, Clydesdale Bank have taken the decision to cease lending for ‘Foreign Currency Mortgages’.
The Directive’s exact definition of a ‘foreign currency loan’ is a credit agreement where the credit is:
(a) denominated in a currency other than that in which the consumer receives the income or holds the assets from which the credit is to be repaid; or
(b) denominated in a currency other than that of the Member State in which the consumer is resident
Therefore Clydesdale are now unable to consider using any non-sterling element of a customer’s income, unable to lend to any individual who is not resident in the United Kingdom, and for interest only mortgages they are unable to consider any non-sterling repayment vehicle.
Yorkshire Building Society, and their intermediary arm Accord Mortgages, are also no longer accepting foreign currency income, nor will they deem repayment of credit via sale of a foreign asset acceptable, where they previously could.
Changes introduced by Santander have been less abrupt; they will continue to consider applications where some of the employed income is paid in a foreign currency, though they do insist on a 25% haircut and will assess affordability on the discounted figure.
Woolwich (Barclays Plc) have also made some adaptations to their process. They are still accepting foreign income but warn of changes to come in the run up to March 2016.
Currently buy to let (BLT) mortgages fall outside of the regulation which applies to residential mortgages. The distinction has arisen because professional landlords are generally viewed as business borrowers requiring less supervision, whereas accidental landlords are viewed as consumers and therefore require more protection.
As BLT lending is not regulated by the FCA, it is shielded somewhat from the new directive, though the EMCD has led to the Government creating a new category of BTL Lending, ‘Consumer Buy to Let’.
As a result, people who want to let their former homes even for short periods may soon find it harder to get a BTL mortgage.
Homeowners who become ‘accidental landlords’, because they need to relocate for work or because they can’t sell their property for example, will be most affected by the new ruling.
At present, it is generally easier to obtain a BTL mortgage as they are not subject to the Mortgage Market Review.
BTL lenders primarily look at the expected rental earnings when assessing a mortgage as opposed to the applicant’s income which is used for residential mortgages. Most lenders require the rental earnings to equal 125% of the mortgage repayments. Lenders also test affordability against a higher interest rate than the customer is signing up for, to ensure they will be able to cover the repayments if interest rates rise.
This is however likely to change under the new directive and accidental landlords will have to pass similar affordability tests to those obtaining a regular residential mortgages.
All of these changes are of course set up with the view of protecting the consumer, although in the short term many will feel disadvantaged. This yet again stresses the importance of obtaining sound advice when looking to take out a new mortgage, or indeed when remortgaging. As professional mortgage advisers, it is our job to keep clued up with any policy changes, and to have a good knowledge each of the lenders’ criteria.
We are able to recommend lenders who will use the full sterling equivalent of your income, even when denominated in foreign currency. We can also advise on how best to structure your mortgage, and how to plan for any future changes, so that you don’t get caught out with any prevailing or looming directives.
Regulatory changes by the governing bodies are outside of our control, so the best thing we can do is anticipate any likely impacts early, and plan ahead according.