Remortgaging to become harder under new European affordability rules

27th March 2015


Borrowers wanting to switch lenders to remortgage will have to undergo strict affordability assessments, even if they do not wish to borrow more, under new European rules.


The Financial Conduct Authority (FCA) has updated its rules following the publication of new rules from Europe, known as the Mortgage Credit Directive.


The regulator said there had been a ‘compatibility’ issue between the directive and ‘our existing responsible lending regime and had consequently changed the rules. This means that all consumers wanting to re-mortgage with a new lender in order to get a better deal will have to undergo tough affordability testing, even if they do not want to borrow more money.


Borrowers will not be subject to the test if they wish to switch mortgage with their existing lender as long as there is no additional borrowing, and no change in circumstance that would materially affect affordability.


There is a concern that the new rules will trap borrowers in bad deals, much as the stricter affordability rules that were introduced last year, locked a number of first-time buyers out of the market.


The FCA said the change ‘may lead to a set of customers becoming trapped in contracts with unfavourable terms, leading consequently to some of these customers suffering payment difficulties, and in the extreme, default’.


With low interest rates keeping mortgage rates at historic lows, being trapped is in a mortgage offering is unlikely to cause to much detriment but as interest rates rise and push up standard variable rates (SVRs) – which borrowers default to when their mortgage terms is  – it could become a problem.


The regulator said that ‘the impact might not be very large in the low interest environment today, but could become more severe were base rates to rise’.


The FCA said it did not believe the European rules meant to prevent people from switching products ‘where there is no material impact on affordability, and where that change could be brought into effect through other means’.



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