Mortgage illustrations and the Mortgage Credit Directive

mortgage documentationFrom 21st of March 2016 the UK mortgage market is subject to additional legislation under the EU driven Mortgage Credit Directive (MCD).

As a result of this, mortgage lenders are required to change the format of the way they illustrate mortgage products from the current ‘key features illustration’ style to the new ‘European Standardised Information Sheet’.

The Financial Conduct Authority has decided that, rather than asking lenders to immediately switch to the new ESIS format, they should offer lenders the option to continue to use the KFI format with some additional information supplied (this is being referred to as KFI+ or KFI Plus).

What does this mean to you as the borrower?

When mortgage illustrations were first standardised in 2004, the intention was to make it easy for the borrower to compare different mortgage offers from different lenders.

Although the key features illustration (KFI) format was not perfect, it did meet this aim as illustrations for one lender looked and read the same as illustrations from another.

Under these new transitional rules you may find yourself with one set of mortgage figures in a KFI+ format and another set in ESIS format. Since the two formats are very different this is liable to cause problems.

Therefore for your information here are our guide notes as to differences between the two formats and what to watch out for.

KFI – Key Features Illustration

The KFI format is set out with the information displayed across 14 boxed sections. With some KFI’s you will also see final page showing a summary of mortgage payments.

We produced an explanation of how to read a KFI for our clients some years ago and this is still available in both video and written format.

ESIS – European Standardised Information Sheet

The ESIS format is set out across 14 boxed sections in the same way as the KFI, the confusion is that the boxes are in a different order and contain different information.

Initial box

Contains the borrower’s details, the date of illustration, and any reference number.

ESIS Box 1 – lender

Details of the lender

Has no corresponding box in a KFI

ESIS Box 2 – credit intermediary

Details of the credit intermediary (mortgage broker)

Corresponds to box 13 in a KFI

ESIS Box 3 – main features of the loan

Size of loan, loan term, total be repaid, may also contain details of the security property

Contains information listed in boxes 3,4 & 5 of a KFI

ESIS Box 4 -interest rate of the costs

Pay rate and rate type of the product.

This section also contains a figure called the annual percentage rate of charge or (APRC). This is likely to be alarming to some borrowers as in heavy type figures are quoted for the effective interest rate of your mortgage should interest rates rise markedly. You may see a figure quoted here of 12% or more, but do not panic. The legislation requires the lender base the calculation here on the highest interest rate seen over the past 20 years. This figure therefore may not bear any relation to current rates or likely market conditions.

Contains information listed in boxes 4 & 8 of a KFI

ESIS Box 5 – frequency a number of payments

Outlines how often you need to pay and how many times.

Corresponds to box 6 in a KFI

ESIS Box 6 – amount of each instalment

Monthly payments both on the initial rate, and on any later rates.

Again, an annual percentage rate of charge figure is shown here in bold which will indicate the payment figure at perhaps more than double your intended payment. Please remember this is a national calculation based on the effect on your payments if mortgage rates were to rise to their highest level as seen over the past 20 years.

If you are concerned about the APRC figures quoted and require further clarification please speak to your mortgage broker.

Also corresponds to box 6 in a KFI

ESIS Box 7 – additional obligations

Further requirements from the borrower in connection with the mortgage, an example of which would be the requirement to racial buildings insurance is in place.

Corresponds to box 9 in a KFI

ESIS Box 8 – early repayment charges

Charges for repaying in part or in full.

Corresponds to box 10 in a KFI

ESIS Box 9 – flexible features

Details of any additional features flexibility on your mortgage an example would be the ability to overpay.

Corresponds to box 12 in a KFI

ESIS Box 10 – rights of the borrower

Simply states that you do not have the right to withdraw from mortgage once it has started.

New to the ESIS document

ESIS Box 11 – complaints

Contact details for any complaints

New to the ESIS document

ESIS Box 12 – non compliance

What happens if you don’t pay

New to the ESIS document

ESIS Box 13 – additional information

Any additional information relevant to local laws or regulations.

New to the ESIS document

ESIS Box 14 – Supervisor

Details of the regulator of both the lender and the credit intermediary (mortgage broker)

Corresponds to box 1 in the KFI document

Understanding your mortgage illustration

Your Mortgage illustration is designed to help you understand the basis of your mortgage contract with the lender. It is therefore important that you ask any questions to clarify anything that you do not understand within your illustration.

Your mortgage broker will be glad to assist you with any queries.

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