Under a new European Union directive mortgage borrowers will soon be entitled to a cooling-off period. Such cooling-off periods have long applied to hire-purchase and other consumer loan agreements but will be a new feature for mortgages. So how might this affect conveyancing?
The requirement for such a period is contained in a directive on “credit agreements for consumers relating to residential immovable property” - in other words, mortgages on homes. Member States are required to give effect to the provisions of the Directive by March 2016.
The Directive says that “consumers [i.e. borrowers] must be given a cooling-off period to consider the implications of a mortgage offer. This could be either a period of reflection before the mortgage is concluded, a period to withdraw after the conclusion of the mortgage, or a combination of the two. ”
How could a cooling-off period work with mortgages?
If a borrower is obtaining a mortgage in connection with a property purchase (rather than re-mortgaging a property they already own) it would seem virtually impossible to give borrowers the right to change their minds after the purchase and mortgage have been completed.
Under English law a mortgage is a loan secured (or 'charged') on a property. Once the purchase of the property has been completed a buyer can hardly say that they have changed their mind and don't want the mortgage.
That would mean that they would have to return the mortgage money – but unlike a car or other consumer goods a home can't just be handed back to the seller and the purchase money returned.
So the only way they could return the money to the original lender would be to get another mortgage – something which would be difficult to arrange within a short statutory cooling-off period.
'Period of reflection' could delay property sales
Do buyers really need to be given a “period of reflection before the mortgage is concluded” - after all a borrower is not under any legal obligation to complete the moment a mortgage offer is received. So they can already take time to consider the offer if they want to.
However it is often the case when buying a home that a buyer will be under considerable pressure from the seller to exchange contracts and complete the sale. The offer is usually the last thing delaying exchange. So the moment the mortgage offer is issued a buyer will often want his solicitors to arrange exchange and settle a completion date without delay.
Once contracts are exchanged the buyer cannot withdraw and his conveyancing solicitors will have to draw down the mortgage advance in time for completion.
If the law is changed so that borrowers must be given a statutory cooling-off period before the mortgage can be completed this would mean property sales would have to be delayed until the period had expired.
Fortunately the eurocrats of Brussels do seem to have taken this point on board, as the Directive goes on to say that “Member States should be able to provide that the reflection period or right of withdrawal should cease where the consumer undertakes any action which … results in the creation or transfer of a property right connected to or using funds obtained through the credit agreement or, where applicable, transfers the funds to a third party. ”
In other words, if a borrower tells his or her solicitors not to worry about any cooling-off period but to go ahead and draw down the mortgage funds and complete the purchase, then they won't be able to change their mind afterwards.
So why did the EU bother with inserting this provision in its Directive at all? No doubt it provides work for eurocrats but it doesn't seem to provide any useful outcome for consumers.
More rules to help borrowers and encourage cross-border lending
The other provisions of this EU Directive are also very laudable. It is intended to bring in some standardised rules across the EU:
- help borrowers make informed choices
- give banks and other lenders a sound framework for doing business – throughout the EU, not just in the country where they are based.
These measures have been prompted by the financial crisis of recent years which was widely blamed on irresponsible mortgage lending.
They are also supposed to encourage cross-border lending by making it easier for borrowers to get mortgages from banks and lenders based in any EU country rather than just the country in which the property is located.
The Directive requires member states to introduce legislation and rules affecting mortgages. All mortgage lenders would be required to:
- meet standards for clarity and correctness in their advertising and marketing materials
- provide standard information on the characteristics of the loans, so that borrowers can understand the terms, make meaningful comparisons and shop around
- provide adequate explanations on the loans available and their associated risks
- refuse credit if the borrowers cannot demonstrate their ability to repay the loan
- register with national authorities and submit to supervisory controls. The Treasury has to transpose the directive into UK law and the Financial Conduct Authority (FCA) will assume the role of the national financial regulator with responsibility for implementing the rules.
The Treasury and the FCA have announced that they will consult publicly later this year and until then it remains to be seen how much difference the directive will make to UK borrowers.
As a matter of interest, the full directive runs to 52 pages of double-column small type – distinctly difficult to read on-line (perhaps that's the intention!)
English land law is quite different from that in other European countries and solicitors specialising in conveyancing rarely have to worry about rules emanating from Brussels. Let's hope that they don't try to standardise land law across Europe or we will have to wade through more acres (sorry, hectares) of this verbiage.