8 | Regulation Matters - January 2020
Mortgage Prisoners On 28th October 2019, the FCA published Policy Statement PS19/27, which announces new Handbook rules that came into effect on the same date (MCOB 11.9). The new rules have two focal elements; 1. To relax affordability criteria for Mortgage Prisoners. 2. To put the onus on Lenders to communicate effectively to relevant borrowers that it might have become simpler for them to switch to a more affordable mortgage.
Where those criteria are met, the lender can now adopt a modified affordability assessment, which permits the lender to enter into the contract provided that the proposed new loan is ‘more affordable’ than the existing one. The new loan will be ‘more affordable’ where the following criteria are met: n The new mortgage deal’s total costs, either during an introductory deal if there is one, or across the full term, are lower than the total cost of the old mortgage, even taking into account fees levied by both the lender and any intermediary; n The monthly costs are lower; and n The interest rate is lower. Importantly, only lenders who will allow borrowers to switch internally on expiry of any new deal’s introductory rate will be permitted to use the modified criteria. The new rules require lenders who use the modified assessment to make some additional disclosures to borrowers. For example, there will be an explanation of the modified affordability assessment and warnings regarding potential interest rate increases and the fact that total costs may be higher if extending the term beyond that of the existing arrangement (if relevant). The new rules also establish a requirement for lenders to let relevant borrowers know by 1st September 2020 that new rules might mean that they might find it easier to switch to a more affordable mortgage. This requirement applies to active and inactive lenders; and also to authorised administrators acting for unregulated entities (e.g. organisations that have purchased loans from lenders that have wound down). WHAT IMPACT MIGHT THE NEW RULES HAVE? There has been some response in the market to this, for example Ipswich Building Society has released six new products tailored for Mortgage Prisoners. The new rules are widely regarded as a step in the right direction. However, some commentators have expressed concern that the changes are insufficient to make real change to most mortgage prisoners. Nonetheless, financial planners can be on the lookout for clients who might benefit and mortgage advisers might see an increase in demand for advice as mortgage prisoners are made aware of the potential to switch to a more affordable loan. WHAT SHOULD FIRMS DO NOW? Consider whether the rule changes might be advantageous to some existing clients or might generate demand for advice from mortgage prisoners.
BACKGROUND Mortgage Prisoners were inadvertently created in 2014, when the Mortgage Market Review (MMR) brought in much more stringent affordability criteria, and placed the responsibility for evidencing affordability squarely on the Lenders’ shoulders. Borrowers who took out mortgages based on pre- MMR criteria and who now don’t meet the new stricter criteria are effectively trapped because they can’t meet the standard affordability requirements. Once their current product deals end, they therefore can’t switch, forcing them onto more expensive terms than those available elsewhere in the marketplace. THE NEW RULES Standard affordability rules require the lender to assess affordability based on the customer’s income and expenditure. The new rules though, permit the use of modified affordability assessment rules where a consumer meets the following criteria: n The Borrower has a current mortgage; n Is up to date with their mortgage payments, i.e. no ’payment shortfall’, and has been for the last 12 months; n Does not want any additional borrowing, other than to finance any arrangement fees for the mortgage, including any fees charged by any intermediary; n Is looking to switch to a new mortgage secured on the currently mortgaged property.
DO YOU NEED FURTHER HELP OR SUPPORT? If you have concerns about being compliant, get in touch with TenetSelect, the directly authorised regulatory experts, by calling 0800 085 0825. We have a wide range of services to help your firm, and we would love to have a chat to tell you more. Regulation Matters is produced by TenetSelect as guidance only and is based on their interpretation, it is not and should not be relied upon as professional or legal advice. TenetSelect does not accept any liability for any losses arising directly or indirectly in connection with any of the information contained within Regulations Matters to the extent it can be excluded by law.
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