Opinion Former Article

CML: New mortgage rules are to protect consumers

New mortgage rules to kick in on 26 April

by Michelle Vosper, Public Affairs Manager, Council of Mortgage Lenders

The UK mortgage industry will see the largest change to regulation in a decade on 26 April 2014, when the Mortgage Market Review (MMR) changes are formally implemented. The rules, which are being introduced to reinforce consumer protection, are overseen by the industry regulator the Financial Conduct Authority (FCA). A paper by the House of Commons Library explains the background behind the MMR.

Lenders, brokers and consumers will notice changes in mortgage applications, and the ongoing administration of mortgage accounts, as lenders switch over to the new rules. The rule changes are wide-ranging and detailed.

• There will be a clear distinction between mortgages sold on an “advised” and on an “execution-only” basis, with most future sales and variations being advised, requiring staff to be trained and qualified to the required standard to give advice.

• Procedures for giving advice to borrowers will be more detailed. Firms will need to ask more questions to determine what mortgage product is suitable, taking into account individual needs and circumstances, so mortgage interviews could take longer and may even be split into two separate interviews.

• As well as buyers, remortgagors will also find that the process has changed. People wishing to make changes to their existing mortgages will also be affected, and may be required to go through an advised process and a new affordability assessment.

• The new rules reinforce measures to assess the future affordability of mortgages, as well as initial payments. Lenders will apply an interest rate "stress test" - to ensure that the loan would still pass the affordability requirements even if the borrower's payments were higher. Lenders will also have to consider the impact of known future changes, such as retirement or redundancy, when assessing affordability.

• Lenders will have to make a more detailed assessment of the borrower's expenditure, including normal spending as well as credit card and other loan repayments. Borrowers may need to produce more evidence of their spending habits and other commitments than before. 

• It will still be possible to take out an interest-only mortgage, but this is likely to remain a niche product. Customers wishing to take out an interest-only loan must demonstrate a credible repayment strategy to repay the loan at the end of term and any costs associated with that strategy must be taken into account in assessing affordability.   

To help consumers, we have published information on the five key changes that mortgage customers will see as a result of the new mortgage rules. Information to explain how applying for a mortgage works under the new system has also been published by both the FCA and the Money Advice service.

The overwhelming majority of lenders are on course to implement the new rules for mortgage lending. Indeed, some have already switched their systems over and are applying the new rules in practice. Some customers therefore may have already seen changes in the process of taking out – or even amending – a mortgage, and will definitely do so after 26 April.

Borrowers will see benefits from greater consistency in the approach to assessing whether the mortgage is affordable, and appropriate to individual needs and circumstances. But, they will also see a process that is more intrusive and onerous than they may have experienced in the past.

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