The European Union (EU) has agreed to a tighter set of guidelines for mortgage lenders, which after April 2014 will see borrowers having to pass a standard affordability assessment to get a mortgage.
Whilst the new directive is designed to prevent a repeat of the runaway lending seen before the credit crunch, it will also contain provisions to make it easier for potential borrowers to shop around the mortgage market, to get the best deal.
However, the Council of Mortgage Lenders (CML) has warned tighter guidelines will have little impact on the UK mortgage market, as similar rules are already in place; with greater protection and information already being available to potential borrowers.
New guidelines will be enforced in all 27 EU member countries, providing every state agrees to the change at a vote to be held on 11th June.
All amendments must be agreed by the EU parliament, and all member states must accept the change.
Key features of the agreement include:
- More standardised information to be available to all borrowers to help them find the correct mortgage
- Lenders will fully detail the specifics of a loan, including the effects of interest rate changes and more information will be given about borrowing in a foreign currency
- Plans to stamp out misleading advertising
- The right to repay a mortgage early, although a fee may be charged
- Lenders should show more patience and understanding with individuals who run into financial problems, rather than pushing for an early repossession
EU Internal Market Commissioner, Michel Barnier, said: “The financial crisis started with the sub prime debacle in the United States where mortgages were being handed out with no background checks carried out on whether consumers could afford them, and ill-informed and often vulnerable consumers were encouraged to take excessive risk.”
He continued: “We have seen similar excesses in Europe, for example with the housing booms and the inevitable busts which followed in Spain and Ireland.”
He added: “Consumers will finally get the protection they deserve. They will be better informed so they can choose the mortgage product which best meets their needs, at the best price, and fully aware of the risks they are taking.”
Mortgage rules changed in the UK
The UK mortgage market has recently undergone a major review, which has made the application process tighter, and with the affordability checks being enforced from this time next year it will become even harder for some applicants to get a mortgage.
Paul Smee, Director General of the CML said: “For consumers, the requirements of the directive add little to the consumer protection and information that UK customers already receive, since our regulatory regime is already the most advanced among European member states.”
Smee continued: “For customers in some other member states, the changes will result in increased protection and greater consistency.”
Experts are hoping these changes will help put a stop to potential borrowers from taking on more debt than they can afford to pay back.
During the recent property boom, many borrowers over committed themselves, with large numbers turning to interest-only mortgages, which were seen as a way of reducing monthly mortgage payments as no capital was repaid from the debt on a monthly basis.
Furthermore many borrowers also used self-certification mortgages to overstate their income, allowing them to increase their level of borrowing, which many may have found unsustainable following the credit crunch and on-going financial crisis.