News has come to the fore this week concerning a new ruling from the EU that looks to be coming into effect next year. Called the Mortgage Credit Directive, it could mean thousands of people end up paying more for their mortgage than they currently are.
What’s the new ruling about?
According to news reports, the ruling will mean homeowners who want to re-mortgage their properties will only escape affordability tests if they move onto a different mortgage offered by the same lender they are currently with.
This is different to the current situation, whereby the Mortgage Market Review introduced in 2014 only applies strict tests to those who are buying a property. Anyone who currently wants to re-mortgage does not have to meet affordability tests. However the new ruling means existing borrowers will have to meet these strict criteria – unless they decide to stick with the provider they currently have a mortgage with.
What could this mean for homeowners?
This means there is a good chance people will end up paying more for their mortgage payments over the lifetime of the mortgage itself. At present many homeowners can move from one provider to another to chase the best rates, potentially slashing thousands off the cost of their mortgage in the process. Since the MMR rules don’t apply to people who are re-mortgaging in the UK, they don’t have to worry about jumping through hoops to prove they can afford the new mortgage terms.
However when the new ruling from the EU comes into effect – likely to be in March 2016 – this will no longer be the case. Homeowners will then have to go through the strict affordability tests already in place for new buyers if they want to switch over to a more affordable deal.
Why is the ruling being brought in?
The idea is that the EU wants to ensure everyone can afford to pay their mortgage even if circumstances become more complex. They want to be certain mortgage payments will always be affordable for those who are paying them.
This all seems fair enough, but it has already been proven that if people do not want to go through the affordability tests – or fail at the attempt – they may end up paying more for their mortgage than they would if they switched. With superbly-low interest rates available from many providers at the moment, many people are switching mortgages in order to get a cheaper deal. Under the new ruling they wouldn’t be able to do this unless they passed the required affordability tests. And since they have already been paying a mortgage successfully – possibly for some time – it seems a moot point that they should prove they can pay something that would be cheaper.
It remains to be seen whether the ruling will indeed come into effect and the potential fallout that could be generated as a result. However it seems certain lots of people will be switching mortgages before next March rolls around.