From March 21st, borrowers overseas buying UK property will have new rights to change their loan if there are major foreign currency fluctuations. In essence this gives customers the opportunity to switch their loan to/from Sterling if exchange rates fluctuate more than 20 per cent.
The challenge is that new rules have been introduced which now force lenders (and subsequently the specialist brokers, the lender selects to distribute their products through) to provide much more information about the impact foreign exchange rates can have on mortgages when borrowers take out the loan.
On the face of it, this is a helpful rule on paper, giving greater protection to borrowers hit by global market fluctuations.
There have been a number of high-profile examples of currencies shifting sharply at short-notice. For example, the Swiss Franc rose 40 per cent in single day in February 2015 when the Swiss National Bank unpegged it from the euro unexpectedly. Sterling has weakened significantly against the Dollar in recent months, losing more than 10% of its relative value. The significant down valuation of the Russian Rouble has caused UK expats working in the Russian oil and gas industry significant problems and only yesterday was their sensationalist news, that Saudia Arabia could be bankrupt by 2020
While we are always pleased to see borrowers given sensible protection, they must work in practice.
Internally within the UK, the most common use of foreign currency mortgages is between Northern Ireland and Ireland where the euro and sterling is in joint use, given employment over the borders. Or for British residents buying overseas property in Spain, France or another Mediterranean hotspot.
With a temperamental and unpredictable Eurozone crisis in full swing, currency issues are a major challenge for prospective borrowers.
However, at Capital Fortune we deal with a significant number of expats, paid in foreign currency and purchasing property here in the UK, and it is these borrowers most effected by the rules. It is interesting, that well intentioned rules, designed to give greater protection cause an ever increasing regulatory burden on our lending partners and many rather than implement the change, simply withdraw from the market.
There becomes less protection through less choice rather than more and this never seems the theoretical intention of regulators, but does more often than not, appear its practical consequence.
Reducing choice
Since the rules were announced in the European Mortgage Credit Directive, many lenders have been reviewing their offerings.
It means that a number of lenders including Nationwide have actually pulled out of the sector either arguing they are not geared up to deal with the provision of the additional information required by the regulators or on the basis that loans have become too expensive.
Lenders believe that if a currency changes 20 per cent relative to Sterling and they are forced to convert loans then it would cost them a fortune. They do want to take that risk.
The UK regulator, the Financial Conduct Authority – which monitors the mortgage market – has even argued the rules are too broad and need to change.
We want borrowers to feel they are safe from the worst market conditions and much regulation is beneficial.
But unfortunately this rule, which comes fully into force next month, will reduce choice for borrowers in a number of situations involving foreign currency. Many lenders have acted already by cutting their offers in preparation for the new rules. Rather than enhancing European integration the rules could have the opposite effect with many British Expats disenfranchised from the majority of mortgage lenders because they live outside of the UK.
It has proven a big concern for many clients and we are monitoring the market closely to see who still offers deals and who has withdrawn. If you may be affected by these changes then you should seek advice immediately and see how you are affected.
It may be the banks allows you to continue on your foreign currency mortgage but prevents further advances. You may have other options from more specialist lenders but seeking advice will open up the whole market for you.
