A set of controversial mortgage rules that will provide additional information to borrowers have been approved by the European Parliament, despite criticism from a range of industry insiders. The directive has been given provisional approval by the EU with a final vote in the autumn expected to be a formality.
Many industry experts have branded the new regulations as ‘useless and confusing’ and believe it will actually make mortgages more difficult to understand. Keep reading to find out more about the ‘crackpot’ regulations.
Second APR figure and mortgage rules prove misleading for borrowers
Under the new EU rules, mortgage lenders across Europe will be forced to display worst-case scenarios to borrowers taking on a loan. The Daily Telegraph reports that this will involve every lender listing the maximum interest rate it has charged over the past 20 years despite this having no bearing on its current deals. This figure will be displayed as prominently as other rates and will apply to most mortgages sold in Britain.
“At the moment, the only rate that truly influences the cost of a high value mortgage is the interest rate being charged,” says Islay Robinson, CEO of London mortgage broker Enness Private Clients. “If you take a fixed or tracker rate then the interest rate you pay determines your monthly payments.
“Lenders already display a misleading figure in the form of an APR. The APR takes into account the total costs of a mortgage over the term, including fees, and while borrowers see this figure in their literature it’s highly likely that they will never pay it.
“So, adding yet another figure to marketing material and quotes – this time based on another random figure that the consumer is unlikely to pay – is madness,” he added.
The EU rules will require lenders to show what a borrower’s repayments would be if the highest Standard Variable Rate registered over the past 20 years was used instead. For most lenders this will be around 10 per cent.
In a statement, the European Parliament said: “Anyone signing up for a mortgage in the EU should receive comparable information about the products available, and understand the total cost and long-run financial consequences of taking out the loan. Credit terms offered to borrowers would have to match their current financial situation and take account of their prospects and possible downturns.”
Despite the opposition to the plans, MEPs have now adopted the final wording of the proposals. They will now seek confirmation from each EU member state of how the rules will be enforced, which could differ slightly according to country.
Mr Robinson from Enness Private Clients, the large mortgage experts, added: “Consumers are already confused by one APR figure and so adding another random number will just make things worse. The chances of a borrower ever paying either figure are negligible and so using them as a comparison is likely to be misleading in the extreme.
“In addition, many established financial institutions have valid concerns that newer lenders who have entered the market since rates have been at record lows will appear preferable as they have operated in a higher interest rate environment. If a new lender’s standard variable rate has never been higher than 4 or 5 per cent they are going to look appealing when compared to other banks when the truth may be very different,” he added.