When the Mortgage Market Review (MMR) took hold of the market, borrowers were required to pass tougher affordability assessments in order to get a mortgage, trapping many creditworthy customers with their existing lender.
To combat this, the Financial Conduct Authority (FCA) created the transitional rules, which meant lenders could offer existing or new customers mortgages without forcing them to jump through the same hoops. The proviso was that the borrower could not increase the amount of the mortgage balance.
This was heralded as a commonsense move by the regulator but it was a short-lived victory. The MCD rules promptly cut this lifeline off only allowing lenders to move their own customers under the transitional arrangements.
This week our panel of experts considers the impact this restriction will have on the UK’s mortgage prisoners.
Dean Mason, practice principal, Masons Financial Planning, expects mortgage prisoners to continue to be woefully underserved after the MCD deadline and discusses lenders’ can’t do attitudes to the rules.
Alex Hill, head of business standards and risk at Stonebridge Group, talks about the network support needed for all brokers to place cases with lenders using the transitional rules.
Payam Azadi, director of Niche Advice Limited, discusses why the transitional rules were always doomed to fail and what the industry needs to do next to free borrowers.
In our experience the FCA transitional rules have slipped so far under the radar they are dragging along the floor and I don’t see the MCD restrictions making any difference to what is the bluntest of tools anyway.
Clearly clients who fall into the mortgage prisoner bracket would be keen to take advantage of it, but like most brokers, I suspect, we stopped discussing it in detail as soon as it quickly became apparent these ‘rules’ were irrelevant to lenders.
Anyone actually dealing with lenders on a daily basis post-MMR knows asking them to underwrite a case using the premise of these rules when the client doesn’t fit their MMR interpretation would be laughed off the phone. We have found that some lenders (notably Halifax) do treat an existing client simply switching products in a sensible manner, unless they are on interest only or are borrowing beyond age 65.
If we meet a client who needs to remortgage to another lender, with or without extra borrowing, and we know they won’t pass the new lender’s criteria, we now know not to waste everyone’s time by submitting the case.
We tried it several times when the FCA first announced what sounded like a real commonsense move to help these forgotten borrowers. Each time the response was similar and the result the same, ‘it’s outside our criteria/affordability’.
It’s fair to say lenders have chosen to completely ignore the transitional rules, much as they now do with TCF [Treating Customers Fairly], for fear of falling foul of MMR.
The transitional rules introduced at the time of the MMR showed real common sense from the regulator and followed the spirit of fair treatment of consumers. These rules were brought in on the basis that, a borrower who wanted to change their rate to a cheaper one could do so without the need to meet a lender’s current affordability rules, or demonstrate a repayment strategy for interest only.
This is all providing the borrower is borrowing no more money or changing key elements of the mortgage. If they are paying the mortgage now, then the chances of paying in the future are surely improved if the new mortgage terms are better than the borrower would be on without the switch of rate.
However, with the pending MCD rules, it seems the situation will change. The opportunity for customers to remortgage to a new lender without an affordability assessment will no longer be an option, which is disappointing. While only a small number of customers have gone down the remortgage route so far, this didn’t really have time to get off the ground and its withdrawal will only serve to restrict the options available to mortgage prisoners.
As a network, we introduced processes in 2014 which would allow our appointed representatives to transact both product transfer and remortgage business using the transitional rules, where this is in the best interests of the customer. This made sense for both our advisers and customers alike – the rules were put in place for good reasons so we wanted to make sure we had the right offering as soon as MMR came into force.
It is reassuring that a rate switch with the existing lender will still remain possible. Many high street lenders currently offer rate switches without the need to assess affordability (although still only a few actively offer these via the intermediary channel), and it seems this will not change once the MCD rules come into effect. It would be encouraging if more lenders would actively offer product transfers via the broker market and reward advisers for their time in the same way as they do for new business.
I understand why the regulator has tried to put in place transitional rules, but ultimately after MMR everybody is more worried about the affordability of the mortgage.
If I’m being honest, I believe there is a serious problem with the fact that many applicants cannot move lenders because of the greater level of scrutiny around affordability. This issue ultimately needs to be addressed by their existing lender.
With an ageing population, the issue of affordability into retirement is likely to be ongoing and I for one have not seen a comprehensive solution for existing mortgage prisoners.
While the lender is responsible for the affordability of the mortgage throughout the term, regulatory pressures are rightly being enforced across all distribution channels which means, as a broker, we have to ensure applicants applying for mortgages can afford that mortgage by our own standards, as well as the lenders.
These standards may be outlined in guidelines given out by networks or external compliance service providers. Ultimately we as a firm have taken a decision to only recommend products that are deemed to be affordable for the applicant and yes this does mean we have lots of conversations where we tell clients that their mortgage requirements are simply not feasible.
A more holistic thought process needs to be given to existing clients. To help I suggest further exploration into the passing of mortgages down the generations (gift of equity), inclusion of guarantors and additional applicants, term extension and greater flexibility around repayment methods.