The European directive on credit agreements relating to residential property (CARRP) has had its final amendments voted through – leaving the UK buy-to-let industry heaving a cautious sigh of relief, and seeking to change some fundamentals in the house-buying market.
For example, lenders would not be able to make a mortgage offer conditional on borrowers taking out specific insurance products. And while they will be able to seek fair compensation if a borrower pays off a mortgage early, they will not be allowed to levy penalties.
There will also be a mandatory 14-day cooling off period, giving customers the chance to change their minds on a mortgage deal.
The UK will be allowed to exempt buy-to-let mortgages from the directive, lifting the threat that all buy-to-let lending would have to be assessed without taking rental income into account. It had been proposed that buy-to-let lenders would have to assess mortgage applications in exactly the same way as residential mortgages.
Key Facts Indicators will be replaced in five years by the European Standardised Information Sheet, which critics say will be costly to implement and is far less informative.
None of the changes are quite a done deal, as the legislation still has some way to go, but pundits took encouragement from yesterday’s decisions. The UK government will actively have to enforce the buy-to-let exemption, and can only do so if they are convinced there is no detriment to consumers. The Government will now come under renewed pressure to make the exemption.
A spokesperson for the Council of Mortgage Lenders said: “We’re pleased to see that many of the long-standing issues we have been lobbying on have reached a positive outcome for the UK in the EU Parliament.
“So for example, the UK would be able to exempt buy-to-let from the Directive and we would be able to keep the KFI for five years after the Directive has been implemented.
“However, some provisions have been included which only emerged at a late stage of negotiations but which may not have had their full implications considered, and we will continue to work on these issues as the Directive goes into its next stage of discussions.”
Alan Ward, chairman of the Residential Landlords Association, said that the decision by MEPs was a ‘common sense solution to a measure that would have crippled the private rental market in the UK’. He went on: “With a chronic shortage of properties in the sector, the initial proposals would have exacerbated the problem still further, causing more difficulties and higher rents for those looking for accommodation.”
The final amendments to the Directive were voted on yesterday morning by the Economic and Monetary Affairs Committee of the European Parliament.
Afterwards, a statement said: “These rules should also ensure that buyers are offered mortgages that are tailored to their needs and that their creditworthiness is properly assessed. Buyers who fail to repay a loan would be better protected against seizure of their assets. To curb irresponsible lending, mortgage sellers would be better supervised.”
MEPs have stiffened the requirements proposed by the Commission on information to be provided before the borrower signs a mortgage, and inserted rules on the borrower’s ‘financial education’.
The text says that any financial advice given to borrowers should be impartial, and enable them to understand the long-term financial consequences of taking out the loan. Everyone signing up for a mortgage should receive comparable information about the products available, and be informed whether there is any financial incentive that might lead the adviser to recommend a particular product.
The credit terms offered to borrowers must be in line with their present financial situation and their prospects, it adds.
The rules aim to protect borrowers not only from irresponsible lending, but also from their own misjudgements, and also to ensure that mortgages go only to those who can afford them.
MEPs have added a new rule stipulating that the return of collateral such as the property will suffice to repay the loan, provided that the lender and borrower expressly agree to this in the contract.
Where a borrower defaults on a loan, MEPs want arrangements to ensure that the lender makes every reasonable effort to solve the problem before initiating foreclosure proceedings.
They also aim to ensure that arrangements for settling the debt outstanding after the property has been sold are reasonable with regard to the borrower’s circumstances, e.g. family situation. These arrangements could include limiting the seizure of wages, retirement pensions, etc, so as to ensure that the borrower retains a minimum household income.
Borrowers would have a 14-day cooling off and reflection period after signing the mortgage deal, during which they could withdraw from it.
MEPs also inserted flexibility provisions, including a right for the borrower to repay the loan early and a right for the lender to receive a fair compensation for such early repayment. However, making borrowers pay penalties for early repayment would be prohibited.
MEPs decided that where expressly agreed by both parties to the mortgage deal, borrowers should be able to transfer the mortgage from one residential property to another when moving house.
MEPs also sought for the first time to regulate tying practices. As amended, the legislation would prohibit lenders from making loan offers conditional upon the purchase of insurance or other financial products from a specified provider, although lenders could nonetheless require borrowers to take out an insurance policy with specific characteristics, and refuse the loan if they declined to do so.