In its response to the Commission’s call for evidence on the EU regulatory framework for financial services the FCA said by adopting a ‘very broad definition’ of foreign currency mortgages the Mortgage Credit Directive (MCD) imposes burdens on lenders where no risk of exchange rate fluctuation existed.
Under MCD, a mortgage becomes a foreign currency loan if the customer receives the income or holds the assets from which the loan is to be repaid in a different currency.
The regulator uses the example of a UK pensioner buying a property in Spain using a mortgage secured on their UK property using pension income paid in sterling to repay the loan. Under the MCD’s definition this would be classed as a foreign currency loan forcing the lender to shoulder some of the risks caused by currency fluctuations and offer consumers additional protections.
The directive dictates consumers have the right to convert the mortgage into an alternative currency if, for example, there is a 20% fluctuation between the two currencies involved in the transaction. Alternatively there must be arrangements in place to limit the exchange rate risk to which the consumer is exposed by taking out a foreign currency loan.
In its response, the FCA said: “Rather than introducing the additional disclosure systems the MCD requires for foreign currency lending, many lenders are choosing to no longer accept customers who want a foreign currency loan.
“So a measure intended to promote single market activity is inadvertently causing some lenders to withdraw from dealing with customers residing in another EEA state.”
Shortly after the MCD rules were published, lenders including Lloyds Banking Group, Clydesdale, Nationwide and more recently TSB all said they would not offer foreign currency loans.
The FCA wants the Commission to improve its definition of foreign currency loans ‘to better align with the exchange rate risk the directive is seeking to address’. This approach, said the regulator, would encourage lenders back into the market to service the needs of consumers who, while they may be living in a second member state, are protected from exchange rate risk because their mortgage and income are in the same currency.
Consider my position. I am a UK national, living in the UK but paid as a freelancer in US dollars and Japanese Yen. Today I was told by my current lender that they wouldn’t lend me anymore money (despite only requiring an amount that would be sill be less than 4 x my income) because under these new rules the mortgage would be classified as a foreign currency mortgage. If this is true, we cannot move house or extend the current one. God knows what the rules will be in 3 years time when my current fixed rate comes to and end.