A Time to Reflect…….
The Mortgage Credit Directive (MCD) is a piece of European legislation which has been introduced to enable a single European market for mortgages and protect consumers. The purpose is to set regulatory requirements that member states are required to meet, to protect consumers who are taking out mortgages over residential properties and to provide pre-contractual information to consumers in a standardised format. It has been implemented through the rules set by the Financial Conduct Authority (FCA). The new requirements took effect from 21 March 2016.
The MCD applies to all loans secured against a property and therefore to first and second (and any subsequent) mortgages. It will also apply to any consumer buy-to-let mortgage which is defined as ‘a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.’
The main changes are:
- A reflection period of at least seven days, to give the consumer time to compare offers, assess their implications and make an informed decision. During the reflection period, the offer is binding on the lender but the borrower can accept or reject the offer at any time. If you only receive a mortgage offer at the last stage of a transaction, and intend to exchange and complete simultaneously or soon after receipt of the mortgage offer, you may need to waive your rights to reflect on the offer. Once a request for funds is sent to a lender this will be deemed acceptance of the mortgage by the borrower.
- In addition, the lender will need to provide an explanation of the product’s essential features and the impact on the borrower, including the implications in the event of a default under the terms of the product.
- The rules also require the lender to issue a European Standardised Information Sheet (ESIS). This will replace the Key Facts Illustration (KFI) which set out the key facts about your mortgage. The ESIS will become mandatory by 21 March 2019, although lenders can choose to use it before that date. If a lender uses a KFI rather than an ESIS, the borrower must be advised of the following:
(a) the reflection period; and
(b) information on the Annual Percentage Rate of Charge (which shows how much the borrowing will cost over an average year, including any changes to fees such as redemption and/or valuation fees).
4. For foreign currency loans, the borrower must be given a currency exchange risk warning i.e. that exchange rates can fluctuate.
Lenders or mortgage brokers who deal with second charge loans will also need to obtain the same Financial Conduct Authority (FCA) permissions that apply to first charge mortgages. You will be able to check if a mortgage advisor is registered with the FCA, and subject to the FCA mortgage regulations, by checking the Financial Services Register.