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Mortgage Credit Directive Explained

The Mortgage Credit Directive is a legal framework that was put together by the EU to conduct rules for any individual, firm or introducer offering first charges, second charge consumer buy to let mortgages on residential property in the UK. The new legislation was implemented by the Financial Conduct Authority on 21st March 2016.

The new regulation treats first and second charge mortgages equally - so whilst second charge loans used to fall under consumer credit, now any businesses, lenders or brokers offering this service must be authorised and hold the correct permissions for mortgages. For second charge customers, it means that they must now go through the more thorough checks associated with getting a mortgage, rather than a standard loan.

The MCD applies to credit agreements that are secured by a residential mortgage and to credit agreements used to acquire or retain property rights in land or in an existing or projected building. The rules are applicable to the following stakeholders involved in mortgages and bridge finance:

  • Credit/lenders
  • Intermediaries/brokers/introducers
  • Appointed sales representatives

The directive was set up by the EU as part of the G20 commitment to improve the conditions and underwriting of credit agreements relating to immovable residential property (Source: Wikipedia). The decision was aimed to safeguard and prevent irresponsible lending and borrowing in the mortgage markets that caused havoc in the US during the housing crisis of 2006 to 2008, perfectly portrayed in the film "The Big Short."

 

Mortgage-Credit-Directive-informs-customers

 

Overview

The Mortgage Credit Directive sets out some common rules for mortgage lenders and brokers to follow. In doing so, this should create a residential market that better informs customers about the real costs of a mortgage and allow them to compare effectively between competitors. There is a key aspect to reflect on the mortgage contract before going ahead and this is aimed to protect mortgage applications from unfair and misleading practices by firms.

 

Key Features

The following are adapted from The Government's Guide of EU Mortgage Credit Directive.

Before the mortgage contract is completed, applicants will be provided with a European Standardised Information Sheet (andbook.fca.org.uk/handbook/MCOB/5A/Annex1.html?date=2016-03-21#DES62">ESIS). This is similar to the pre-contractual information that is given to most mortgage applicants across Europe but the ESIS is more detailed.

It includes a seven-day reflection period for the borrower to decide whether or not they want the loan and the EU member state can decide whether to administer this in the pre-sale or post-sale period.

The document includes the impact of interest rates including the Annual Percentage Rate of Charge (APRC) and offers example monthly payments in case they rise to the highest level in the past 20 years. This is a way of saying that 'this is the highest you could pay' in extreme circumstances.

The ESIS must be given in good time before the closing of the credit agreement allowing the customer to compare other rates and ask for third party advice.

 

Annual Percentage Rate of Charge (APRC)

Part of the ruling of the directive means that customers are presented with the Annual Percentage Rate of Charge (andbook.fca.org.uk/handbook/MCOB/10A/1.html?date=2016-06-30">APRC) and this should allow borrowers to do the following:

  • See the whole cost of the mortgage and all fees
  • How much the mortgage would cost if you kept it for the full loan term i.e 5 years, 10 years 25 years etc
  • Compare effectively against other similar mortgage products.

Example of APRC: Imagine you want to borrow £500,000 with a 25-year mortgage. Halifax charges 1.14% on a two-year fixed rate deal but once the two year period ends, you will be subject to paying the standard variable rate of 4.99%. Therefore as part of the new regulations, the APRC shows you the full cost for the entire loan term as though it were 25 years, giving you an interest rate of 4.6%.

So ultimately the APRC shows you what you would be paying if you stayed with the same mortgage agreement for the entire loan period. However, this is unlikely as people realise that they can save massively by remortgaging at the end of the introductory period. So it is important for applicants and borrowers to look at the introductory rate first, which in this case is 1.14%.

 

Binding Offers

Mortgage lenders are now required to make a binding offer when providing a mortgage contract. A binding offer is when a mortgage provider draws up a contract stating the terms of the agreement and willingness to lend. It is part of a legal contract but does not become officially legally binding in a court of law unless the borrower accepts and signs the contract. It is common for binding offers to remain open some time to allow the borrower to make a decision and also consider other alternatives.

 

7 day Reflection period

Customers now have a 7-day reflection period where they can think and decide if the mortgage agreement is right for them. During this time, they can also investigate and compare other deals available. Since this was introduced by the EU, all member states can decide whether they introduce the 7-day period pre-sale or post-sale of the mortgage agreement, or even a combination of the two.

 

Tying and Bundling

The Directive has strict rules on lenders that want to 'tie' or 'bundle' additional products or services with the credit agreement. This has usually been offered by lenders to diversify and compete with other companies but can also lead to less mobility for customers and the feeling of being tied down. Therefore, the new rulings aim to limit bundling that can have a negative impact on the borrower but also keep anything which may be beneficial.

 

Property Valuations

Whilst most lenders and brokers already encouraged property valuations prior to forming credit agreements, it is now a requirement to have a valuation that is internationally recognised by the likes of the International Valuation Standards Committee and the Royal Institution of Chartered Surveyors.

 

Foreign Currency

There are now measures in place to protect those that are applying for loans in a foreign currency. Since exchange rates can fluctuate massively over a mortgage term that lasts several years, there is now an effort to safeguard borrowers from exchange rate risks.

 

Assessing a Customer's Creditworthiness

Additional guidance has been issued for lenders to assess a customer's credit prior to engaging in a mortgage contract. This can be through the use of credit checking via a credit reference agency such as Experian, Equifax or CallCredit.

The customers’ ability to refinance the credit agreement should be assessed and verified before the conclusion of the credit agreement. The assessment should also reflect on other factors that may inhibit their repayment of a loan such as number of dependents, income, debt to loan ratio and other commitments. Lenders and brokers must look beyond the fact that investing and purchasing a property can generate more income and value and this should not be an excuse for giving credit.

 

Allow Early Repayment

Whilst already common with most mortgage lenders and providers, customers must now always be given the option to repay their loan early, before the credit agreement ends. In fact, the ability to clear their debts early can play quite a big role when comparing the different rates and cost of a loan. The Mortgage Credit Directive believes that the option to repay early promotes healthy competition in the industry and financial stability within the sector.

 

Accidental Landlords

The MCD includes new rules if you suddenly become an accidental landlord such as inheriting a property or needing to let out your primarily residence.

This is the first time ever that accidental landlords will be regulated by the Financial Conduct Authority which implies much stricter income and affordability assessments than previously, as though you were applying for a typical mortgage.

The MCD has also brought in new rules if you’re an ‘accidental’ landlord, for example if you’ve inherited a property, or if you plan to let out a property that you have previously lived in as your main home.

However, if you are professional landlord with a limited company and own more than one buy-to-let property, you will continue to fall outside the scope of the FCA. So if you are an accidental landlord, this may be an option to take to limit your compliancy needs.

 

What About Commercial Property?

The MCD totally excludes commercial property that is used for purchase or buy-to-let. This includes office blocks, shops on the high street, gyms, schools and more.

The new legislation also excludes properties that are 'mixed use' provided that the property is used more for commercial than residential reasons. An example of this is an office building with a flat above it.

The directive also excludes any contract for the purposes of a person's business, trade or professional, assuming that the borrower is not acting as the consumer.

 


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What is Modular Housing?

We recently wrote an article on how the Ealing council was using shipping containers to resolve their housing crisis. Using makeshift containers and portacabins to address the short-term housing needs is a type of modular housing, a craze that is sweeping the UK and redefining how the world builds property.

Modular Housing refers to prefabricated buildings that are made up of different modules and put together. Think of them as big lego pieces to construct a property. Modular homes are typically very small and only used as a short-term residence and way of providing lodgers with the essential living items. Examples of those using modular housing include:

  • Soldiers on army bases
  • Nurses on hospital sites
  • Construction workers on large building sites
  • Schools and classrooms

Also known as "prefab homes" or "container homes" they offer a new dimension to the construction world because they are made off site, typically in a warehouse, so you don't have to worry about being delayed by weather conditions. In addition, they take only a few days or weeks to build, speeding up the process by several months or years compared to a regular build.

The constructions are created by the use of computer aided designed (CAD) and the use of 3D printing is helping make great advances in this space. (Source: The Guardian)

Given the fast turnaround and small space requirements, the UK Government has pledged to build 100,000 new modular homes by the year 2020. (Source: The Daily Mail). This is part of Theresa May's larger scale project to add 1 million new homes in the next 3 years.

What Are The Benefits of Modular Housing?

Built in a factory: Being built in a climate controlled area is a huge advantage over traditional stick-built homes. There are no delays due to planning permission or bad weather, meaning that modular buildings can be worked on all year round. Each section moves through the next stage of quality control until they are ready to be transported to the building site and then assembled with cranes. A great example of this was shown in a recent HSBC advert below:

 

Quick turn around: Modular homes can be built in a factory environment in up to 2 weeks, which is significantly faster than the average home which can take up to a year. It typically takes 2 to 4 weeks for a local builder to complete the home on site once it is delivered, however, this can be shortened with the help of a team.

Energy efficient: The building process is very energy efficient, making use of green materials where possible and allowing people to save on their heat and electricity costs. One of the biggest advantages is that there is no waste to the local environment and above all, no noise to disturb local residents compared to regular site builds.

Help housing: Where housing is scarce or there are not enough properties to service the demand, modular living offers a low-cost alternative to put a roof over peoples' heads. This is why it has been given the go-ahead by the UK Government and will increase significantly across the world over the next few years.

Service remote locations: For work projects that require a lot of staff, there is the opportunity to provide low-cost housing. This will save time and money for employees and save them having to journey in and out of the site. For this reason, we see modular homes being used on big industrial sites, large constructions and even hospitals. The modular homes were used in World War II as a way to accommodate soldiers.

What Are Modular Homes Made From?

The materials used in modular housing are generally the same as a regular constructed home including wood-frame floors, roofs and walls. Depending on the company, some modular homes include brick or stone exteriors, granite counters and steeply pitched roofs.

Modulars can be designed to sit on a perimeter foundation or basement. Modular buildings can be custom built to a client's specifications to include multi-story units, multi-family units and entire apartment complexes.

Are Modular Homes and Mobile Homes The Same?

The answer is no. Modular houses are not mobile homes despite looking quite similar in appearance. They cannot simply be picked up and moved like a mobile home, nor are they on wheels. Also, mobile homes can be full time living quarters whereas modular is intended for the short-term.

One way to decipher between the two is that a mobile home will have a small metal tag outside each section. If this is not evident, you should find the details on the electrical panel box which will also display the manufacturing date. By comparison, modular constructions will have a data plate installed inside the home giving all the information about its manufacture and this will typically be located under the kitchen sink or closet.

Planning Permission For Modular Homes

You will need to speak to your local planning authority (LPA) as to whether you require planning permission. Typically you will need some kind of consent as you cannot just set one up in the middle of the street, park or unused land because this will have an impact to neighbours or land owners.

There are no restrictions if you set it up on a construction site and you are responsible for the entire area. There is limited planning required if the modular construction is just temporary i.e less than 28 days. Click here for more information.

Other Uses

Modular homes are not necessarily a budget form of housing to be used short-term. One German designer has created an artistically edgy building using modules and this is now on sale for around £88,000. expensive-modular-home

In the trendy Shoreditch area of London, they have developed "Box Park" and used shipping containers as retails shops. It is an effective use of space, low-cost and as they say in that part of town, 'hipster.'

In the US, they are simply making homes using modules. They look like regular homes and similar to the standard American homes made from wood. It is all about creating something in modules and piecing them together - so it doesn't need to be for temporary housing. In fact, using CAD technology and 3D printing, it could be the future of housing as we know it.