New Mortgage Rules May Curb Expat Borrowing

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An overlooked clause in the new European Union Mortgage Credit Directive could see thousands of expats barred from taking out a home loan.

While lenders and mortgage advisers have focussed on the impact the directive will have on home buyers and consumer buy to let landlords, new rules about foreign currency mortgages have remained in the shadows.

The directive looks at foreign currency mortgages and home loans taken out by borrowers earning currency in a different denomination than the mortgage they have borrowed.

The directive says lenders must offer expats the option of switching their mortgage to the same currency as their earnings if the exchange rates between the two currencies rise or fall by 20% or more.

Fluctuating foreign exchange trigger

While fluctuating by a fifth is a big change in foreign currency exchange rates, the risk is this may happen between the British pound and the euro or one of the many other European Union currencies at some time.

For example, if Greece had retained the drachma instead of joining the Eurozone, the probability is the drachma would have been devalued as an economic tool to make Greek exports more competitive.

If this swing was big enough, under the new directive a UK lender denominating a mortgage in sterling would have had to offer a borrower in Greece an equivalent mortgage in Drachma.

Switching the currency of a mortgage like this would then turn out as expensive for the lender.

Lenders may pull loans

The result is many lenders are having behind-closed-doors discussions with the Council of Mortgage Lenders (CML) about whether the risk of offering mortgages to expats is too high.

The directive not only affects the currency denomination of the loan but the currency the mortgage applicant earns their income in.

Nationwide Building Society and Lloyds Bank have already pulled foreign currency mortgages.

The directive instructs mortgage advisers to alert lenders if their client has an income in a currency other than that of their income or that of a European Economic Area state where they are resident.

The European Union Mortgage Credit Directive takes effect from March 21, 2016

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