Before the MCD arrives in March, it’s worth getting your head around the regulations governing foreign currency mortgages
As the deadline for the implementation of the EU Mortgage Credit Directive looms ever closer, it has become apparent to me that there is still a degree of misunderstanding about foreign currency mortgages.
In days gone by, some mortgage products were marketed in which the loan was provided in a foreign currency. The appeal was that savvy borrowers could benefit from differences in exchange rates. However, exchange rates did not always work to the borrower’s advantage and foreign currency mortgages fell out of favour.
So why have they suddenly come to the fore again?
The answer is that one of the key aims of the MCD is to harmonise mortgage regulation across EU member states and the regulator wants to ensure that borrowers who live in one country but generate income or hold assets in another are not disadvantaged.
This concept of having a mortgage in one currency but generating income, or having assets that are used to repay the mortgage, in another is core to the regulations governing foreign currency mortgages.
Take the example of a borrower who is a UK citizen and who lives, works and buys property in the UK – a very ‘normal’ housebuyer. However, they work for an international business and receive their annual bonus in euros. If the bonus is used to repay the mortgage, the loan is classified as a ‘foreign currency mortgage’ under the new regulations.
To confirm, if the borrower uses any assets (not just salary or bonus; it could be shares, for example) to repay their mortgage that are in a different currency from it, the loan is a foreign currency mortgage.
This is a big deal because a significant number of lenders have said they will not offer foreign currency mortgages after the introduction of the MCD in March. The reason they give is that the number of foreign currency mortgages they deal with is so small that it is not cost-effective to change their systems and procedures to accommodate the new regulations.
If, however, a lender does continue to offer foreign currency mortgages, the MCD says that borrowers must be allowed, under specified conditions, to convert their loan into an alternative currency, or other arrangements must be put in place to limit the exchange rate risk to which the consumer is exposed (meaning that the lender shares the risk).
The good news is that several lenders will continue to offer foreign currency mortgages post-MCD, so you should not think that this is a sector that will wither and die. On the contrary: it may prove to be a sector that grows and flourishes.
And do not make the mistake of thinking that foreign currency mortgages are relevant only to wealthy bankers and senior executives of international firms. They can apply to a wide range of borrowers. The only issue is whether those borrowers have a salary, bonus or other assets in a foreign currency that will be used to repay their mortgage.
Another example could be someone who owns a property abroad that they intend to sell to repay capital on an interest-only mortgage on their main residence in the UK.
If you have clients whom you think may require a foreign currency mortgage, it is worth spending a bit of time understanding the new regulations and identifying which lenders will offer these mortgages after the introduction of the MCD in March.
Peter Izard is business development manager at Investec Private Banking