What Mortgage Regulation currently exists and how does it protect borrowers?

publication date: Mar 9, 2010
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Article Series 1-4 - Should Buy to Let Mortgages be Regulated?
Article Two

What Mortgage Regulation currently exists and how does it protect borrowers?

Currently mortgages are regulated for residential so that:-

1. There is clear information for consumers so they can easily compare mortgages.

2. There is clarity of pricing information in any advertising and marketing material.

3. The pros and cons of the mortgages offered must appear in adverts/marketing material.

4. If advice is given, then firms must prove they gave a 'suitable' mortgage for the borrower's needs.

5. Lenders and advisers must consider the consumer’s ability to afford the mortgage if interest rates, for example, change. 

6. Any charges associated with the mortgage must not be excessive.

7. Improvements to the way borrowers struggling to pay the mortgage or facing repossession are dealt with.

8. Those that give advice must undertake specialist training.

The regulation also led to the Financial Services Compensation Scheme which provides a safety net for consumers, helping with compensation when financial firms go bust and allowing people who are unhappy and have a legitimate complaint, to apply to the Financial Ombudsman Service.

However, BTL mortgages were not included in this regulatory reform and as a result, lenders and advisors can link product sales to insurance products as a condition of finance. They can put pressure on borrowers to switch their banking services and don’t have to be transparent in the marketing of products and literature produced.

So have buy to let lenders missed out because mortgages weren’t regulated? History tells up probably not. To date, the FSA has fined or closed down several mortgage companies and a further seven (according to the BBC) are under investigation and 65 have been asked to check they sold the mortgages properly.  Indeed, it didn’t stop Northern Rock offering a staggering 24% of its 800,000 mortgage holders a 'Together mortgage' which allowed borrowers a 95% mortgage and a further unsecured loan of up to 30% of the property's value. How anyone could have advised on this product when property prices were obviously not performing from as early as 2006 in some areas, is quite frankly astonishing.

Over and above this, it appears that regulation of mortgages hasn’t stopped brokers and lenders completely ignoring their own regulations. For example, the Lender’s Handbook says that the lender must be told if a property has been transacted on in the last six months. It's up to the lender what they do with that information and before the credit crunch they weren't as strict with what they did as they are now. This was especially bad for buy to let investors who were encouraged to buy a property, then remortgage it to its hilt, to buy more property, getting deeper and deeper into debt.

Now they are implementing this rule however, there are many companies who are finding ‘workarounds’ to still allow investors to buy a property with ‘no money down’ or to buy it, remortgage within the six months and then buy another property with the proceeds.

For example, read this article on the solicitors that appear to be assisting in mortgage fraud: Solicitors probed over mortgage fraud.

Article Three - Why Should Buy to Let Mortgages be Regulated?

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