The seemingly unstoppable rise of Nigel Farage’s Ukip and the increasingly hostile nature of Prime Minister David Cameron’s pronouncements on the European Union suggest that a UK exit could well be on the cards. But with Europe increasingly driving regulatory change across financial services, leaving the EU could have significant ramifications for the mortgage market.
Cameron has stated his intention to put a limit on European migration into the UK, despite a recent study from University College London concluding that EU migrants made a positive financial contribution to the UK economy of £4.4bn between 1995 and 2011.
Germany’s Chancellor Angela Merkel is reported as saying such a move would take Britain “past the point of no return” and could result in the UK leaving the EU.
The UK has also clashed openly with the European Commission over a £1.7bn EU surcharge, which Cameron has insisted will not be paid.
The Conservatives have promised an in/out referendum on EU membership in 2017.
John Charcol senior technical manager Ray Boulger says it would take years for the UK to transfer fully out of the EU, with the potential for a stand-off on the mortgage credit directive in the event of a referendum Yes vote.
He says: “Even if we vote to leave in 2017, the actual process of departing the EU would take years, and that raises the question over what the EU could do if the UK chose not to implement the MCD. Would the UK be fined as it is still a member? It could lead to a real stand-off.
“It seems to pose more of a threat to the ongoing health of the EU. If the UK stands up and says we want to leave, does the EU then punish us by stopping trade? I highly doubt it would, so that creates the impression among other countries that you can leave the union and continue to function without too adversely affecting trade.”
But London & Country associate director of communications David Hollingworth plays down the impact that exit from the EU would have on the UK market.
“I don’t think it would have a massive impact on the mortgage market,” he says. “The MCD will bring changes, but probably more niggling reforms rather than completely altering the face of UK mortgage regulation.
“Given that the MCD is going to land before the proposed date for the EU referendum in 2017, it is unlikely that the market will reverse any changes brought in by the new regulations.”
Experts also say the potential fallout from a UK departure could have far-reaching consequences for financial markets.
Capital Economics senior UK economist Samuel Tombs says a UK exit from the EU would put pressure on the Bank of England to keep interest rates low.
He says: “On the one hand, any economic disruption caused by leaving the EU in the near term could lead to the Monetary Policy Committee leaving interest rates low for longer than they otherwise would have. That would perhaps benefit mortgage-holders on floating-rate mortgages.
“However, there could be heightened risk aversion in financial markets, for example, in the gilt markets, if investors become concerned about the future of the economy.
“It could result in the cost of lending in the UK going up as there is certainly a risk of the short-term cost of wholesale funding rising for a period. There would certainly be some disruption.”
GPS Economics director Gary Styles says a UK departure from the EU could have wider implications for the eurozone itself, but the impact on the UK mortgage market is almost impossible to calculate at this stage.
He says: “It is a massive issue and I don’t think for one minute that this can be boiled down simply. There are so many factors to consider from a macroeconomic and microeconomic viewpoint.
“We’ve never seen an expulsion from the EU, so who knows with any certainty what it could mean? It may lead to questions being asked about the whole future of the Euro project itself.”
How the Mortgage Credit Directive will impact the UK
The EU mortgage credit directive has been under discussion for about 10 years and aims to harmonise mortgage regulation in all 28 member states.Key aspects include:
- A requirement for lenders to provide an extra APR outlining worst case scenarios for borrowers
- The European standardised information sheet, which will replace the KFI used in the UK. Lenders may be able to keep the KFI for five years after the final rules have been agreed on if the regulator chooses to do so.
The Government has also published a consultation on the MCD, which proposes that “accidental landlords” – borrowers who have not actively decided to buy a property to let it and are not acting in a business capacity – must be regulated. Under current UK rules, the buy-to-let sector is unregulated.
In addition, the directive calls for second-charge mortgages – which now fall under the FCA’s remit, having been transferred from the Office of Fair Trading – to be regulated in the same way as first-charge mortgages.