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  • Mortgages & Finance

    Start preparing now - big changes coming to BTL lending scene in 2014 ...

    The Mortgage Market Review recommendations come into effect on 26th April next year and landlords should start preparing now.

    What was the MMR?

    The MMR was a comprehensive review of the mortgage market, which started with a Discussion Paper in 2009 and culminated in a Policy Statement and final rules in October 2012. All policy papers are listed at the bottom of the page.

    What is the background to this?

    The MMR set out the case for reforming the mortgage market to ensure it is sustainable and works better for consumers.

    It had become clear by the height of the market in 2007, that, while the mortgage market had worked well for many people, it had been a cause of severe hardship for others. The regulatory framework in place at the time had proved to be ineffective in constraining particularly high-risk lending and borrowing. The MMR package of reforms is aimed at ensuring the continued access to mortgages for the great majority of customers who can afford it, while preventing a return to the poor practices that we saw in the past.

    What will the MMR mean for firms?

    The majority of the MMR changes come into effect on 26 April 2014. Those that will be most relevant are:

    For intermediaires

    >The removal of the requirement on intermediaries to assess affordability.

    >The removal of the non-advised sales process.

    >Most interactive sales (e.g. face to face or telephone) to be advised.

    >An 'execution only' sales process for non-interactive sales (internet and postal).

    >Every seller required to hold a relevant mortgage qualification.

    >It will no longer be compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they want to). Instead, certain key messages about a firm’s service must be given to customers.

    >The Key Facts Illustration will not have to be given every time the firm provides the customer with information about a product that is specific to them. Instead, it will only be required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want in an execution-only sale.

    For lenders

    >Lenders will be fully responsible for assessing whether the customer can afford the loan, and they will have to verify the customer's income. They can still choose to use intermediaries in this process, but lenders will remain responsible.
    >Lenders will still be allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
    >There are transitional provisions in the MMR that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan. The borrowing will not be able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases will remain with the lender.

    What's next?

    Second charge mortgages: The government has decided that the responsibility for regulating second charge mortgages will transfer to the FCA alongside the wider transfer of consumer credit regulation in April 2014.

    The Mortgage Credit Directive: There is a proposed Directive on Credit Agreements relating to Residential Property, known as the Mortgage Credit Directive. The directive is being discussed by the European Parliament, Council and Commission. Once the directive has been formally adopted and published, it is currently proposed that Member States will have two years to implement it into national law (some additional transitional arrangements, for a further year, have been proposed by the Parliament).

    The Treasury and the FCA will consult on any legislative and regulatory changes that are necessary within this timeframe.

    Thanks to Howard Rueben of HD Consultants on Property118 for highlighting ...

    What this mean for landlords:

    At least 3 months bank statements will need to be provided, the entries on the bank statements will be much closer looked at to determine the borrowers lifestyle, there will be much closer cross-referencing between HMRC and the submitted accounts / payslips,

    If employed, lenders like to see that you’re not in a probationary period, so may need to wait a month or so before applying. If knowingly being made redundant, or if about to go on maternity leave, this must all be disclosed too.

    If self employed, know that the lenders look at your net profit (not turnover) and try and make sure that it is the same or possibly higher than previous years. Lenders like to see an increase year on year before they consider providing you with the best mortgage products/ rates.

    Obtain a copy of your credit files – either Experian and/ or Equifax to ensure that you have a clean credit history. It costs about £2. If there are mistakes on the records, these can be requested to be removed … and this would be essential to secure best ‘prime’ rates

    On the same note, if there are any missed payments showing, or defaults or arrears or CCJ’s or bankruptcies, these need to be satisfied asap too. Lenders will want full explanations of why they occurred

    Do NOT use ‘wonga’ style payday loans – some mortgage lenders are now declining applications when they see these entries on the bank statements

    Ensure you are all on the electoral roll where you currently reside.

    Increase savings to pay deposit and to cover purchase costs, Stamp Duty, solicitors fees etc
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    I'd have to question the accuracy, although if you remove any reference to BTL this is a great post on Residential Changes.

    The private rental sector has effectively been left untouched by the MMR, despite a hefty overhaul elsewhere. The market will not go unaffected, however.

    As lenders implement guidelines across Residential Purchases this will cross over to Buy to Let. As it is "best practice" in some cases.
    In addition as many brokers are part of "networks" this will evolve their compliance requirements for Residential and leak into Buy to Let.
    The MMR is not directed nor required for Buy to Let.

    Take for example from the above "Every seller required to hold a relevant mortgage qualification" - not with Buy to Let. This remains unregulated and is not "advice" its a commercial loan.

    In addition Intermediaries will still be required to assess affordability, their is no change in this. The only change is that FCA has said that the lender is ultimately responsible to verify. Which in most cases they do anyway!
    As a intermediary is providing the "advice" saying "ohh the lender will check income" is not acceptable.
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    Thanks for the input Adam.

    I was really posting this to alert landlords how they can help their brokers help them. Smile
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    Wink You know what I'm like with regulation - that nasty stuff that makes everyone the same and hinders innovation. Happy that Buy to Let remains mainly untouched.

    The MMR originally wanted to regulate Buy to Let but the FCA backed down from this. Can not remember their reasoning.
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    Couple of questions on the broker side of things;

    1/ What is their thought process of getting rid of IDD and KFI?
    2/ Is CeMAP still the relevant qualification or have they upped it to a QCF 4 qualification such as DipMAP like they did for IFAs in the Retail Distribution Review?

    And for borrowers; the bit about new borrowing is not allowed to exceed current loan, is this saying the days of remortgaing to pull out equity are over, OR do they just need to go to a different lender? Confused what they're saying on this point...
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    Daniel,
    1. It removes the requirement to provide a KFI or IDD. A broker can still provide or a customer can request it. Not exactly sure why, but I think Europe has a new kind of document that is a simpler version of a KFI that will require it again soon.
    2. Certificate in Mortgage Advice and Practice is still standard - as well as Continuing professional development.

    Your last question - i think that only applies to "mortgage prisoners" due to the MMR review... Generally you are still allowed to re-mortgage to release equity.
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    Thanks Adam,

    On Point 1, I guess simplifying things is a good step, I always liked receiving those things and thought good for transparency, so seemed strange in a time where lack of transparency is in the news that they'd remove that requirement.
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    Adam - whereas you are technically correct that BTL funding will remain largely unaffected by the impending MMR overhaul, let's not forget that BTL mortgage products are provided from a number of different sources.

    You state " "Every seller required to hold a relevant mortgage qualification" - not with Buy to Let. This remains unregulated and is not "advice" its a commercial loan." ..... however that very much depends on whether the borrower works with an unregulated broker or not.

    To clarify; some BTL deals are regulated (family member tenants, for example), most BTL deals are provided by the 'big banks' who only allow FCA authorised Brokers to have access to their products, and then there are the unregulated (CCL holder only) Brokers who (by definition) do not have whole of market access and only (in my opinion) 'sell' the best product they personally have access to.

    In short, the MMR will most certainly affect all (truly) whole of market Brokers (and why would anyone go anywhere else I often wonder?) who have access to every bank, building society, specialist lender, challenger bank and all of the exclusives that are offered only to Full Members of the NACFB, too.

    Thanks to Vanessa for considering my post on Property118 to be worthy of inclusion into the headline article above.

    In summary, in my (nearly 21 years) as a Broker, and with most of those serving the private rental sector with me and my team providing BTL, commercial and bridging advice to our UK-wide network of Clients (from the 'newbie' investor to some of our Clients who have in excess of 300+ properties each),my experience has concluded that if I was choosing a Broker, it would be someone who has the widest reach of all of the BTL products and lenders, who can prove their accreditations with the regulators and leading trade bodies and - as Vanessa wisely says - who are investors themselves, so that they can speak from 'both sides of the fence'.

    Change is inevitable - as I have seen from the Lautro days to PIA to The Mortgage Code to the FSA and now the FCA and so the MMR is something that every professional Adviser / Broker (not mortgage 'salesman' - a different breed altogether) should be very aware of and in turn should be preparing Clients for in good time.

    Caveat Emptor for every potential borrower who uses a restricted salesman.

    And let's not forget that whereas unregulated Brokers may have CCL's (although some have been caught out not having those - easy to check online by the way), Brokers need to also have the 'correct' PI in place and for those regulated deals which do fall under the FSCS, being directly authorised by the FCA or an AR of a regulated network is, in my opinion, an essential factor too.

    Final point - providing a BTL mortgage product to a Client is not the 'be all and end all' in our Company. A mortgage (whether resi, BTL, commercial, bridging, 2nd charge etc etc) is a debt. A debt against the estate that can't be repaid in the event of premature demise could potentially cause substantial hardship for the survivor and their family. What if the surviving family relied purely on the (surplus) rental income to live on? What if they need the investment properties to remain in situ to provide the family with future financial security? What if the lender forced the sale of the property(ies) in order to recover their mortgage funds? Over a year ago I produced a research paper investigating what BTL lenders would do in the event of a BTL borrower dying during the term of the mortgage. Many lenders kindly replied - but not how most borrowers would have wanted them to. My article (and insight into the report) is published here > https://www.property118.com/life-insuranc...ifa/30889/

    As 'Advisers' (again, I do distinguish between 'blinkered salesmen' and professional Advisers) we consider the full estate planning requirements for each mortgage that's being implemented too. Our in-house Wills and Trusts team, and our life assurance Advisers recommend strategies to help our Clients ensure their financial arrangements are properly implemented to enable their family's financial security to remain robust.

    How many unregulated mortgage sellers can do the same?

    None.

    How many execution only borrowers receive that simultaneous advice?

    None

    How many comparethefurryanimalwebsitecomparison.com product buyers benefit from personalised estate planning advice?

    None.

    The MMR affects everyone (who wants it done right first time). Simpulz.
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    Howard, you make the suggestion that because a firm is FCA regulated then it applies residential regulatory schemes to Buy to let. That is ONLY the case if you are part of a Mortgage Network with such restriction.

    My network like yours implements some of those restrictions. Many other networks dont! .. If a broker is Directly Authorised again they wont have to... The niche BTL networks presumably such as TBMC (PTMortgages) wont have to do any of these requirements unless a lender requests it from them.

    I know our network wont implement all requirements but pick and choose "best practice".
    For instance; networks I don't believe will be mandating that all Buy to Let sales persons have to have CeMap qualifications that are negligible to Commercial Finance.
    If a network does implement this requirement, their members are at a competitive disadvantage over the others considering training and subsequently increased wage.

    MMR has not directly effected Buy to Let, if it does then its voluntary to ensure best practice from Lenders/Networks or Brokers themselves.

    But - its all technicalities. It will effect some brokers and it wont effect others. Nothing in the opening post should be taken as any "legal requirement" - most BTL mortgages remains unregulated.
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    Adam, I concur with your points being made albeit that my fundamental point is not how brokers can get away with not being suitably trained, regulated or qualified, but instead the detrimental consequence to the borrower who uses such a salesperson who tries to cut those corners.

    We (at H D Consultants) don't ever consider the impending changes (nor any of the previous industry / regulatory overhauls) to be an issue. We do not deem it that our hands are tied, because we have always considered (and endeavoured to implement that) our own in-house practices to be one step ahead anyway.

    So, maybe some salesmen will feel competitively disadvantaged because of extra training or underlying increased wage costs etc., but not at chez HD. Our philosophy is simply that the regular training, CPD, compliance scrutiny and Adviser development is all about the end-consumer being best served by the most educated and experienced Advisers.

    My initial post that Vanessa linked to, is also all about the consumer - not how hard done by us poor Brokers are (going to be).

    In fact, taking a step back and surveying the future scene, if the borrowers who would have caused more processing time and additional 'behind the scenes' work fall by the wayside because they don't fit the lenders new initial product and policy criteria, and instead only the serious borrowers apply in the first place, then the ultimate net benefit for professional Advisers (who can also advise on life cover and estate planning matters) should therefore increase.

    In summary, it's not about being DA or part of a network, or picking and choosing best practice, it must surely only ever be 'best practice' everytime throughout all processes and systems (isn't that what TCF is all about?) to ensure that Clients receive the best outcomes for now and for future flexibility requirements.

    Anyway, this forum is not for this type of banter so I won't comment any further on this subject, suffice to say that I will end with my 2-decade mantra of "borrowers need advice, they don't always want it, but I've never met a widow who told me her husband had enough life insurance to cover all eventualities".

    And I've also never met an unregulated or unqualified 'Broker' who can help directly in those matters too.
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    Howard, don't give PT members ideas how to avoid up-selling by going to an none regulated broker!

    All our brokers are qualified, a bit too much for their role(s) - that wont be the case on our expansion path. We put our people in specific roles and not jack of all trades at Bespoke Finance. If you want Buy to Let finance see Paul, Commercial see Mark, Protection see Tony, etc..
    A BTL Specialist has little benefit from being CeMap qualified which focuses on Mortgage Regulation, Law, Policy, Practice mostly on residential basis. They would be better on niche training for their role.

    A competitor would be disadvantaged because of this - someone from our local UNI straight into training for the specific role at a reduced cost and implementing specialist knowledge. In comparison going trough CeMap would mean employment and not been able to answer the phone for ages! .. Not good! to the bottom line.

    If FCA think CeMap is not needed for commercial brokers - who am i to argue Smile

    I think PT members like this kind of banter; insider look into the bureaucracy and regulatory burdens of industries. The parallel cost implications for them if Letting Agents such tight regulation. Imagine the world where a Letting Agent's receptionist can not tell you what the "average rent" is in an area because they have not passed a test and it could be considered advice.
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    THIS PROPERTY TRIBES ACCOUNT IS NO LONGER USED.
    DO NOT SEND PRIVATE MESSAGES.

    --- MORE INFO HERE ---

    YOU CAN REACH ME AT BESPOKE FINANCE or MY TEAM AT 08009202001