The MMR takes effect on 26th April and lenders must fully implement its requirements by this date, although some may launch early. Lenders advise that the two key requirements of the MMR are that borrowers will have to be properly advised, and that they must provide affordability evidence (e.g. income).
Pipeline applications that have been processed under the current regulations and have not completed when the MMR takes effect will be able to continue to completion unless there is a material change to the deal (e.g. a change in the amount of the loan required) or the customers’ circumstances.
We understand many lenders have already implemented some of the MMR’s requirements, but for some at least 26th April will be the final point of cutover for the majority of the MMR changes. The CML does not envisage any disruption to business, but it would be wise to have as many pipeline cases as possible processed before 26th April just in case.
The main impact on borrowers will be the lenders’ requirement to obtain more information about a borrower’s income and expenditure. However we understand IFAs probably already collect a lot of the additional information required under the MMR, so hopefully there will not be any major impact on new home buyers. The lenders will be briefing IFAs of their individual changes, so your IFAs should be fully aware of all the new MMR requirements.
Because most mortgages will have to be “advised sales” under the MMR, it will be even more important for home builders to work with a panel of IFAs with specialist knowledge of the new homes sector.
The lenders have recommended that house builders (or rather their IFAs) should try to ensure mortgage applications are fully processed before 26th April. It is possible that applications that have not been submitted prior to the MMR changes may have to be reassessed.
Mortgage offers made before the MMR date that require a change after the 26th April which materially impacts affordability or, in the case of advised sales, the advice given, will have to be reassessed under the new MMR rules. Non-advised offers can continue to be processed on a non-advised basis for a three month transitional period if a change is required.
Existing mortgage applications (pre 26th April) which do not require any changes, i.e. those which do not need to be revisited from an advice or affordability perspective, can proceed to completion under the existing (pre-MMR) MCOB rules. However we understand that mortgage offers longer than six months, but with a requirement for a new valuation during the mortgage offer period (e.g. after six months), may have to be reassessed under MMR rules.
The one aspect of the MMR with a long-term impact on home builders will be house builders’ own shared-equity schemes (i.e. where the house builder is making a second-charge loan), or shared-equity sales where the house builder is working jointly with another party, such as a S106 shared-equity scheme with a local authority. Help to Buy Equity Loan will not be affected. If there are any such sales going through at present, it is very important that these “pipeline cases” are processed before 26th April. As with all loans, if there is a material change to the deal, there is a risk that the offer may have to be reconsidered under the new MMR rules after 26th April.
The primary issue for shared-equity sales is that the first-charge lender will have to take account of any “known event” within the term of the first-charge mortgage with an impact on the affordability of the first-charge loan.
In relation to shared-equity loans, these events could include: a requirement to redeem a second-charge loan during the term of the first-charge loan term; or the requirement for the borrower to make interest payments or other charges in relation to the shared-equity loan which become due during the first-charge loan term. In such cases the first-charge lender will have to take account of the impact of these events on the affordability of the first-charge loan. The FCA is not expecting lenders to predict the customer’s future circumstances, but they do expect lenders to take a view on whether the shared-equity loan is likely to cause the customer difficulty in repaying their first charge loan.
Where the repayment of the shared-equity loan becomes due during the term of the first-charge loan, the FCA has said that it is not the responsibility of the first-charge lender to determine how the shared-equity loan will be repaid, but that they must consider the impact of the repayment on the affordability of the first-charge loan. Depending on the circumstances of each case and the potential significance of the capital repayment on affordability (e.g. the amount of capital to be repaid and the point during the first-charge term when it becomes due), the lender will consider whether the customer has a credible strategy for dealing with both the shared-equity repayment and the continued payment of the first-charge loan.
Shared-equity second-charge loans for less than the first-charge loan term (e.g. a 10-year shared-equity term against a 25 year first-charge term) will fall within this requirement.
One option, as used in the Help to Buy Equity Loan scheme, is for the house builder to make the second-charge loan payable either at sale of the property or after the term of the first-charge loan (e.g. 25 years plus one day). The lenders may also accept other proposals.
If we learn any more useful information on the likely impact of the MMR we will let you know. In the meantime if you strike any issues which you feel have broader implications for house builders, I would be most grateful if you could let me know.
John Stewart, Director of Economic Affairs.
Home Builders Federation
London, SE1 9PL
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