Mortgage Credit Directive
The Mortgage Credit Directive (MCD) is regulation created by the European Union which was implemented in the UK by 21 March 2016. It sets minimum regulatory requirements that member states must meet to provide consistency in protecting consumers taking out mortgages for residential property.
For more information on MCD visit the FCA website.
We implemented all MCD changes ahead of the 21 March deadline.
This page gives a summary of the key changes and our approach to MCD requirements.
MCD sets out minimum requirements for a new document called the European Standardised Information Sheet (ESIS). By 2019 the ESIS will replace all KFIs but in the interim lenders can choose to either use the new ESIS or continue to use their KFI as long as additional information is included.
- We’ll continue to use KFIs until we move to ESIS at a later date.
- We’ve added additional information to our existing point of sale and offer KFIs.
- There are no changes to how you produce a KFI through Introducer Internet.
Under MCD, the Annual Percentage Rate (APR) will be known as the Annual Percentage Rate of Charge (APRC) for those lenders choosing to use the ESIS document.
As we are still be using KFIs we continue to call this the APR.
MCD also requires a second APR to be provided for loans which have a variable interest rate at any point during the loan term – e.g. fixed rate reverting to SVR. The second APR is an illustrative example of the cost of the loan using a 20 year ‘historic high’ interest rate.
How will it be calculated?
This 20 year high interest rate will be based on a benchmark rate as set by the FCA. The benchmark rate is currently set at 7.25% (20 year historic high base rate (7.50%) minus current base rate (0.25%)). This benchmark rate will change in line with Bank of England base rate.
- For fixed or tracker products reverting to SVR we’ll add the 7.25% benchmark rate to our current SVR of 4.49%; e.g. quoted rate will be 11.74%.
- For lifetime tracker products we’ll add the 7.25% benchmark rate to the product pay rate; e.g. assumed pay rate of 2.39% plus 7.25% = 9.64%. The second APR will automatically be produced within our KFIs in section 7. This replaces the existing illustration “what if interest rates increase by 1%”.
The Directive introduces a seven day period of reflection, similar to a cooling off period that gives customers time to review their offer, make comparisons and assess the implications of taking out the mortgage. It also requires lenders to provide the customer with a binding offer.
We’ll consider an offer to be binding on us in terms of affordability from the date it’s issued, and it can only be withdrawn in certain circumstances including:
- a material change relating to the offer;
- where false and/or inaccurate information has been provided;
- if the conveyancer is unable to confirm requirements such as a satisfactory certificate of title.
Our reflection period will last for ten working days (allowing an additional three days for postage) from the date the mortgage offer is issued. Customers can still complete within the reflection period by accepting the mortgage offer through their solicitor, who will confirm this to us when sending the Certificate of Title.
We consider residential applications where any element of employed income is paid in any of the following foreign currencies:
- US Dollar (USD)
- Euro (EUR)
- Swiss Franc (CHF)
- UAE Dirham (AED)
The sterling equivalent must be calculated and discounted by 25% to allow for currency fluctuations. Due to the continued volatility in foreign currency exchange rates, you need to use the following average exchange rates.
This figure must be input into the £ equivalent field in Introducer Internet.
The following information should be recorded in the general notes within Introducer Internet > Full mortgage application > Regulation:
- Foreign currency amount;
- GBP equivalent;
- Exchange rate on the day of the calculation; and
- Date of calculation.
For residential mortgages the point of sale and offer KFIs will be updated to produce an illustration of the impacts of a 20% adverse movement in exchange rates.
Our straightforward guide to mortgages (page 6) has been updated with a new section to explain foreign currency mortgages and our approach in managing the risks.
Once the mortgage completes we’ll monitor the exchange rates. If there’s an adverse movement by 20% or more we’ll issue your client a letter explaining how the exchange rates have changed, and who to contact if they’re having any difficulties paying their mortgage.
MCD introduces a legislative framework for Consumer Buy to Let (CBTL). This covers the small number of Buy to Lets where the borrower has not entered into the mortgage contract for business/investment purposes.
Buy to Let mortgages for business/investment purposes are not covered by the new MCD rules. This type of mortgage will be known as Investment Buy to Let.
- We’ll offer both Investment BTL and CBTL mortgages.
- We’ll continue to use the same lending policy, rental coverage calculation and products for both.
- View our helpful guide for more information on Investment and Consumer Buy to Let mortgages.
To reduce any impacts on pipeline applications ahead of the MCD effective date, in November 2015 we changed the Buy to Let application form and KFI. Whilst we are capturing information in readiness of MCD, we’ll only classify business as CBTL when we offer/re-offer after 21 February.