Your existing lender and product switches post MMR

How Lenders will now handle product switch applications

On this page we explain:

Why it is best to use a mortgage broker for product switches

  • Your broker will advise you if your lender is likely to require a change of terms or reassessment of your lending
  • You can decide whether you want to proceed or not without approaching your lender direct
  • You maintain control of the situation
  • Your broker can advise if there are better lending options elsewhere

Background

Many borrowers are now aware of some of the major changes in mortgage underwriting as a result of the mortgage market review. These include changes to how affordability is handled, changes to interest only arrangements, and tightening of rules around lending into retirement.

Whilst a borrower may expect to encounter the new rules when moving or re-mortgaging, it has been a surprise to many to come up against them when requesting a simple product switch from their existing lender.

What is a product switch?

If you have a mortgage rate with your current lender that runs for a specific term, your lender will usually give you some other product options at the end of that term under which you can continue lending. Swapping to one of those options is known as a ‘product switch’ , ‘product transfer’, or ‘rate switch’.

Borrowers use a rate switch to obtain a new rate which is more attractive than the lender’s standard variable rate. If you do not take a new rate with your lender you will drop onto a ‘revert rate’ which is typically the lenders standard variable rate (currently between 3.99% and 5.99% for most lenders).

How should lenders be handling existing borrowers?

Following the mortgage market review a new system of mortgage conduct of business rules (MCOB) was put together by the Financial Conduct Authority. Within those rules were a series of ‘transitional arrangements’ under which lenders were told they could exempt existing borrowers from new rules relating to affordability, interest only, and lending into retirement.

These rules are set out under section 11.7 of MCOB 2012.

Why swapping products is not straightforward

Lenders seem to be using the new MMR rules to ‘clean up’ their mortgage book when engaging with existing borrowers on product switches.

We have seen many existing borrowers being asked for:

  • income and outgoings information
  • confirmation as to intention with interest only arrangements
  • queries about pension income
  • queries about lending into retirement

Why is this?

When many current mortgages were taken out, lenders had a much more relaxed attitude to underwriting as did the regulator. Borrowers may have been given mortgages that run past state retirement age, mortgages with no clear capital repayment vehicle, or indeed mortgages without any proof of income. The regulator now considers that these types of arrangements are a risk to the lender and the market and as a result the lender would like to clear them off of their books.

The problem the lender has is that you as the borrower have a contract with the lender under your current terms, whatever they are, and the lender has no practical means of breaking those terms.

As a result, using a product switch as an opportunity to review a mortgage case is attractive for many lenders.

What factors are likely to cause an issue

Under the transitional arrangement rules the FCA have suggested that certain borrowers can be swooped to a new rate by their current lender without impact from the new MMR rules.

This applies where the borrower:

  • is not increasing their borrowing
  • is not increasing their monthly payments
  • does not have a mortgage due to run past their retirement age
  • is not using an interest only arrangement

If you meet all of the above criteria you are likely to have an easier time with your current lender – but there is no guarantee that questions about your situation will not be asked.

How to ensure you are not disadvantaged

The moment your lender is aware of any information that causes them concern they are bound to take some action. The fact that the information is a concern today, but was not when you took out your lending, may be unfair but is a reflection of changes in market regulation.

Clearly when you approach a lender for a product switch, you do not intend to invite a full review of your lending, but this could be the effect in today’s market.

Asking broker to advise on your position before you approach a lender is the best way to maintain your control of the situation.

You should note however that whilst the lender may pester you to change the terms of your mortgage contract you do have a contract. As a result your lender is not in a position to withdraw your current lending on the basis that they are not now comfortable with terms they previously considered suitable.
Similarly you are entitled to move on to your ‘revert rate’ as set out in your mortgage offer regardless of your situation. This may not be the case if you have not made all payments on time and in full.

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