Independent review and analysis

Mortgage Market Review – behind the headlines

Transitional and contract variations

For our second commentary on the detail behind the MMR, looking at the less obvious effects on lenders, home finance providers or loan administrators, we are focussing on contract variations.

With the 26th April fast approaching the market place has seen an overload of information about how brokers and lenders propose to implement the new MMR changes within their policies and procedures and what the effects may be. The focus has been on the sales advice procedure and particularly the new affordability models which could prove restrictive when calculating the amount to be advanced to potential new borrowers.

However, once a borrower has completed a new loan, the affordability responsibilities do not disappear; there is a lot of activity which can take place where the effects of MMR are just as important as in the initial decision to lend.

As an example, the majority of loans will require a product switch during the early years, due to the popularity of short term fixed rates or limited period discounts. The transitional arrangements allow lenders to product switch, if the existing mortgage was in existence before the 26th April 2014, without applying the new affordability and interest-only rules. However, that will only apply when there is no additional borrowing taking place (other than to finance product or arrangement fees) and there are no material changes to the contract. Conversely, not considering affordability when a term extension takes the borrower into retirement or when a mortgage is being converted from repayment to interest-only, could be seen as contravening the assessment rules.

The important point here is that the new rules need to be adhered to throughout the life of the mortgage. So, common factors which take place during the term, such as further advances or transfers of equity – more common now as divorces and separations increase – will need to be considered in more detail than perhaps they have in the past.

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