To provide additional protection for consumers, the Financial Conduct Authority (FCA) are bringing in new regulations this March. The Mortgage Credit Directive (MCD) will raise protection for ‘second-charge’ mortgages in line with those that are ‘first-charge’.
A second charge mortgage is an additional loan which uses the borrower’s home as security. It is second in priority behind the main mortgage loan and if the person is unable to meet their mortgage payments, the first charge lender is repaid before other lenders.
Before a consumer can take on a second charge mortgage, a stress test will be applied to demonstrate their affordability in the likelihood of a rise in interest rates. Other rules to check affordability, such as verifying income and disclosure requirements will also be used. This, combined with the Mortgage Credit Directive (MCD), is designed to prevent consumers from taking on more mortgage debt than they can afford to repay.
The MCD is an EU-wide framework of rules for member states around mortgage activities. Implementing the MCD in the UK will create a consistent level of protection for consumers taking out residential loans and it will be applied equally across first and second charge mortgages. The MCD also introduces additional protection to first charge lending that lenders and intermediaries must meet.
As part of the changes the FCA will transfer the regulation of second charge lending from its consumer credit regime to its mortgage regime. This change is expected to take place on 21st March 2016 and any firms advising on second charge mortgages must have adopted the MCD by this date. This tightening of regulations around second charge mortgage lending should prevent irresponsible borrowing and lending with the intention of creating a more efficient and competitive market in the future.