Cover story: Continental divide

Mortgage Strategy asks what an EU exit would mean for the UK mortgage market. Would the uncertainty over the prospect of the In/Out referendum be greater than that caused by the result?


The biggest political question facing the UK in the next two years is whether it should remain in or leave the EU. The Government has promised an In/Out referendum on membership by the end of 2017, with some suggesting it could take place as early as next year.

Most of the debate so far has focused on how membership affects national sovereignty and immigration flows but financial services would also feel the impact were the country to make an exit.

The UK mortgage sector is affected by tremors in international markets stretching from Beijing to Athens and the upheaval of the EU referendum will be no different. Experts say interest rates could rise and uncertainty could slow both lending and house purchase in the short term should the UK leave the common market.

Banks such as HSBC have threatened to quit the UK, which could weaken their commitment to the British mortgage market.

On the other hand, quitting the EU would free UK mortgage borrowers from the shackles of European mortgage regulation that will come into force next March. The second charge sector could dodge its incoming rules while harmonised disclosure requirements, such as the European Standardised Information Sheet or producing two APRs, could be rolled back.

In June 2013, a Mortgage Strategy poll revealed brokers’ political persuasions, with nearly seven in 10 choosing to support anti-EU party Ukip. 

A poll of more than 800 brokers asked: “Which political party do you support?” Sixty-six per cent of respondents – 533 brokers – said they supported Ukip. This was well ahead of all other political parties, with the Conservatives in second place at 16 per cent, Labour third at 9 per cent, the Green Party next at 7 per cent and the Liberal Democrats at 2 per cent.

Notably, however, ahead of this year’s general election in May, Ukip’s support among brokers had dwindled to just 15.7 per cent.

National polling puts the odds of an EU exit very low, with the latest Ipsos Mori survey from June showing 61 per cent voting to stay in, 27 per cent voting to get out and 12 per cent unsure how to vote.

This is a substantial change since October 2011, when 54 per cent of Britons wanted to leave the EU and 46 per cent wanted to stay in.

Such is the volatility of polls and, after the general election exit polling that got the result so wrong, it is right to remain sceptical.

But what would an EU exit mean for UK mortgages?

House purchases

The key issue is uncertainty, posed as much by the prospect of an EU referendum as by the eventual result. The property market relies greatly on sentiment and, in the run-up to the vote, borrowers could hold back from house purchases as they did before the Scottish referendum last September.

During the campaign on whether Scotland should remain in the UK, many potential homebuyers were put off and there was huge pent-up demand, with the Royal Institution of Chartered Surveyors reporting an 81 per cent surge in buyer demand in the month after the No vote.

Capital Economics property economist Matthew Pointon says of the EU referendum: “In the short term there would be uncertainty, which is never good for the property market, and we would definitely see a decrease in activity. 

“It could be a large bump in the road but, in the longer term, I don’t think it will have a huge impact. We saw in Scotland during their referendum that there was a hiatus in housing market activity but it picked up again once the vote was completed.

“It’s an example of how vulnerable the property market is to sentiment and uncertainty. Any uncertainty makes people hesitate as it’s the biggest purchase of their lives.”

Pointon says lenders could mimic borrower hesitation by holding back lending volumes and increasing rates until there was more clarity.

Mortgage Centre IFA group director Fahim Antoniades highlights big divisions between senior business figures about the ramifications of an EU exit, which makes it difficult to predict the impact.

“A lot of people, such as captains of industry, are really polarised,” he says. “Some say it will have no impact and there will be business as usual, and others are saying it will be an absolute disaster.

“I suspect an exit will create uncertainty, affecting the housing market and all trades, followed by an acclimatisation period when it gets back to business as usual. 

“There will be short-term disruption but long-term business as usual.”

John Charcol senior technical manager Ray Boulger agrees that the housing market is particularly sensitive to uncertainty.

“The market hates uncertainty so in the run-up to the referendum there is likely to be an impact on the top end of the London market,” he says. “Not from UK residents but from foreign buyers.

However, he adds: “I don’t see any reason why it would have a big impact on prices so most UK buyers would not see the referendum as a reason to defer plans.”

But brokers think any uncertainty will be offset by the UK’s attractive stability and by the experience of other non-EU nations, such as Switzerland.

Antoniades believes London property has a greater appeal than the UK’s EU membership and could help it to get past the referendum hump.

“The UK is stable,” he says. “It is not volatile in its economy and politics so, after short-term jitters, it could be back to business. If you look at Switzerland, they are trading happily with the rest of the world.

“London property is a global market; it doesn’t appeal just to people within a 50-mile radius, unlike other cities where homes are bought by locals. The radius of London is the whole planet.”

Interest rates

Another key factor surrounding an EU exit is the impact on the macro-economy and interest rates. How would international markets view the future trajectory of the UK economy and would they wonder about its continuing ability to pay its way?

In a June report on the UK’s credit rating, Moody’s says the country would be put at risk by an EU exit. If lenders viewed the UK as a riskier borrower, this could drive up the cost of financing the public debt, it says.

“Moody’s believes that a withdrawal from the EU would have negative implications for the UK’s growth prospects and – in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU’s single market – would likely put pressure on the UK’s sovereign rating,” it states.

The bonds used to finance UK debt are gilts, which help to price fixed-rate debts, and movement here could push up the cost of fixed-rate mortgages. 

Association of Mortgage Intermediaries chief executive Robert Sinclair says: “The period of uncertainty created by an exit would have some impact on currency and interest rates.” 

Increases in fixed-price deals could have a competitive impact on other rates in the market, which are as yet unknown. But Moody’s warning highlights the potential impact on rates of an EU exit, at least in the short term as international markets adjust to a new reality.

The domicile of banks could also be affected, as with the hint from HSBC, but experts say this would have minimal impact on mortgage lending.

“I doubt it would make much difference to who operates in the UK as they are making that decision based on the UK market and not on a wider basis,” says Sinclair.


Supporters of an EU exit often complain about the effect of excessive European regulation on UK banking and mortgage markets. A plethora of initiatives has emanated from Brussels in recent years, ranging from new capital rules and bankers’ bonus caps to, most importantly, the Mortgage Credit Directive.

The MCD, set to come into force next March, will introduce sweeping reforms to the regulation of housing loans. Second charge mortgages will be regulated in the same way as first charge mortgages. Lenders will have much tougher disclosure rules, such as the need for a second APR and the transformation of the KFI into the ESIS.

Some rules are being introduced in the face of UK opposition from the Treasury and FCA. An EU exit would enable them to be scrapped by either the regulator or the Westminster parliament.

“There would be less pressure from Brussels on the regulation of mortgage lending, which would be good as long as it didn’t run away again as it did before the crash,” says Antoniades.

However, some experts point out that most external regulation derives not from Europe but from global sources, and therefore an exit would not result in a bonfire of unpopular laws. 

“Any watering-down of rules is difficult because, although Europe has set the Mortgage Credit Directive, it is partly based on wider rules, such as capital requirements set at the G7 and G20,” says Sinclair. 

“Financial reporting rules are global while securitisations are global, which drives lender criteria to sell mortgage securities.”

But some rules, such as KFI changes, are not subject to global standards and could therefore be dropped, adds Sinclair.

“All those lenders that stuck with the KFI and didn’t move to the ESIS would be able to remain with the KFI, so it would look like a wise decision. The regulator would then have to make a decision on documentation going forward.”

Known unknowns

The EU referendum will be a major political event in UK history and, in the short term at least, mortgages and housing will face upheaval. The longer-term prospect, however, in a post-EU world is more difficult to predict.

Many like the appeal of less regulation but some warn that global banking standards would still be relevant. Others think London is resilient enough to continue to attract property investors from around the world, regardless of an EU exit.

But there are concerns about the impact on the UK’s credit rating and how this would interplay with interest rates.

Brokers should prepare for the potential effects of an EU exit on their business, including borrower uncertainty, until the referendum result is known. 

The Brussels regulation machine

EU mortgage directive

  • Sweeping new rules on disclosure requirements, second charge and bridging
  • Proposed in March 2011, passed in February 2014 and coming into UK law by March 2016

Capital Requirements Directive 4

  • Introduced a bankers’ bonus cap of 100 per cent of salary, or 200 per cent with shareholder approval, against the wishes of the UK
  • UK fought to ‘gold-plate’ capital rules by going further than the EU, normally illegal under harmonisation rules
  • Resets the definition of mortgage default as relating to capital requirements
  • Proposed in January 2007, came into EU law in July 2013 and entered UK law in January 2014

Securitisation rules

  • Plan to reduce capital requirements on banks using securitisations to boost EU capital markets, which could benefit those raising mortgage- backed securities
  • Proposed last year, with a consultation in June expected to close later this year

Would an EU exit be bad for the mortgage market?   Yes

Dominik Lipnicki
Dominik Lipnicki

Dominik Lipnicki, director at Your Mortgage Decisions

In the EU referendum, the UK electorate will decide the future of our relationship with the rest of Europe. So far, the likes of Ukip have dominated the ‘Out’ argument. The Tories, meanwhile, have been busy putting out soundbites to appear tough on Europe, telling voters and backbenchers that their concerns can be addressed without a total pull-out.

Almost five million voters chose Ukip in the general election. People are listening intently to criticisms of the EU and the UK’s role within it.

I can see how populist ideas may work for some but I am always surprised to find anti-EU sentiment among mortgage brokers. I can think of very few industries that are more reliant on our membership of the EU. The idea that we would be more prosperous and stable as a country if we left the union is not based on cold facts.

Like many, I believe the EU has grown far too big and intrusive. Indeed, I would favour a trading bloc combined with free movement of people, which is closer to the original idea.

Not everything from Brussels is good for our industry, including the upcoming Mortgage Credit Directive, which is both ridiculous and unnecessary given that we have just adjusted to the MMR. Voting to leave, however, would send shockwaves across our economy, threatening what is still a fragile recovery largely based on personal borrowing, some of which we provide.

Many global businesses with a presence in the UK have already announced that they would look to relocate to the European mainland if we voted to leave the union. The very uncertainty is already preventing some foreign companies from investing in the growth of our economy.

None of us should forget the often unfriendly referendum campaign in Scotland last year, with deep wounds that are yet to heal on both sides of the argument. The SNP would jump at a chance to hold another vote, believing that the result this time would be favourable to its cause. In fact, leader Nicola Sturgeon recently refused to rule out a new referendum if Scotland were forced out of the EU. The potential break-up of the UK would be yet another reason for our economy to falter.

My argument is that our industry is totally reliant on the UK’s economy as a whole and the gamble on an ‘Out’ vote is one that should not be taken lightly.

Does the overgrown and largely unaccountable Brussels political machine need to change? Of course it does, and I want the UK to play a leading role in that change. But this cannot happen if we no longer have a seat at the table.

I sincerely hope that the Eurosceptic Tory backbenchers will not push the Government towards an accidental exit – which, in my view, would hurt our country and in turn our industry.

Would an EU exit be bad for the mortgage market?   No


Ray Boulger, senior technical manager at John Charcol

I cannot see why an EU exit would have an impact on mortgage availability. We are seeing more lenders coming into the market even though we know there is a chance we could leave the EU. It is not dissuading people from entering the market.

Will it have an impact on interest rates? Clearly, UK interest rates are affected by the rest of the world and the EU. That would not change if we left the EU.

Some of the Armageddon scenarios are based on the idea that the EU would want to cut ties with us but I do not see that happening. We import more from the EU than we export so it is difficult to think they would want to cut their nose off to spite their face.

Can you see Mercedes and BMW standing idly by and not being able to export to the UK? That is a ludicrous scenario.

When I hear people talk about three million jobs being at risk if we were to leave the EU, that tells me there is not a strong argument left within the pro-EU camp.

First of all, they are only willing to say “at risk”, but what does that mean? In the short term, there is bound to be some disruption, but in the long term there will be some benefits and some disadvantages.

Most of the people who are saying it will be a disaster are the same people who said it would be a disaster if we did not join the euro.

Whether we stay in the EU or whether we leave, the market will adjust. It will take several years to negotiate an exit so it is not as if we will be in the EU one day and out the next. 

The general view is that it would take 18 months to two years for Scotland to leave the EU so it would likely take longer for the whole UK to leave. If we are going to leave, it probably will not happen during this decade, which gives people plenty of time to adjust and negotiate different agreements.

There are likely to be some effects but all the signs are that they will not be large in terms of the housing market and interest rate environment. They will also be happening at a time when other things are happening so it will be difficult to isolate whether the EU is to blame.

It all depends what deal the UK negotiates. There are plenty of British expats living on the continent and plenty of people from the EU living here. It is very much in the interests of the EU and the UK to negotiate a deal that means those people have a fair bit of flexibility.

Clearly, the UK will have a key issue over the free movement of labour. The logical deal would be to give existing residents the same rights but amend the rights for the future.



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