Coming into force in March next year is the EU Mortgage Credit Directive, and it is likely to have a significant impact on many who work in the City.
It has a variety of implications, including for buy-to-let mortgages, but least well-understood is how it will affect the provision of mortgages for people who receive some or all of their income in currencies other than sterling; for instance, bonuses denominated in US dollars. Alongside important new consumer protections, the rules are likely to see a large number of traditional lenders leave the market for clients that earn all or part of their income in a foreign currency.
Earning money in two or more currencies is not as unusual as it sounds. If you work in investment banking or even a large corporate, it is quite common to receive a bonus in dollars or euros, on top of your salary in sterling.
How does this affect your ability to take out a mortgage? It comes down to the affordability assessment. If you’re borrowing £1m and have a £350,000 annual salary in sterling, your income will likely be judged sufficient to enable you to repay the mortgage without needing to access your foreign currency income. But under the new Mortgage Credit Directive rules, if you receive income or hold assets in a currency other than that in which the loan is denominated (most relevantly the euro and the Swiss franc), your mortgage could be deemed to be a currency mortgage.
Until recently, many people in Eastern Europe took out mortgages denominated in Swiss francs, as the currency was perceived to be more stable. But when the Swiss National Bank removed the Swiss franc’s peg with the euro earlier this year, the real cost of their mortgages increased dramatically, as the Swiss franc surged in value against the currency their salary was paid in. While exposure from sharp currency movements will continue to exist, lenders will be obliged to alert their clients that movements have occurred. The new rules are intended to provide greater protection for borrowers who may be exposed to sharp currency movements.
The Mortgage Credit Directive requires lenders to put in place measures to alert borrowers to foreign exchange risk that they may be exposed to. There are conditions attached to this: you are not allowed to simply convert the mortgage into another currency whenever you want to. A lender will have two options on how they chose to comply: either give the right to convert the currency of the mortgage to an alternative currency; or make available other arrangements that limit the risks to the customer of foreign currency fluctuations.
There is an expectation that this new rule will see many traditional high street lenders moving out of the currency mortgage market. The FCA consultation on the Directive saw some consumer and industry stakeholders argue that it would have the counter-productive outcome of causing firms to stop lending and thereby reduce customer access. This doesn’t mean that currency mortgages will no longer be offered. It is, however, likely that they will increasingly only be available from private banks like Investec.
This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.