Intermediary Guide to Mortgage Credit Directive Including Annex: The Borrower’s Guide to Mortgages and Adequate Explanation of Terms

FOR INTERMEDIARY USE ONLY

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CONTENTS INTRODUCTION TO MORTGAGE CREDIT DIRECTIVE Background Pipeline arrangements Training & Competency

NEW REGULATION First & Second Charge loans Foreign currency loans Buy to Let Early repayment

FINANCIAL PROMOTIONS Promotions rules Range of products

INFORMATION FREE OF CHARGE

REMUNERATION

KEY FACTS ILLUSTRATION CHANGES

OFFERS

ANNEX: BORROWER’S GUIDE TO MORTGAGES AND ADEQUATE EXPLANATION OF TERMS

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INTRODUCTION TO MORTGAGE CREDIT DIRECTIVE BACKGROUND The Mortgage Credit Directive (MCD) provides an EU wide framework of conduct rules for mortgage activities and introduces changes to the MCOB regulations in the FCA Handbook.

PIPELINE ARRANGEMENTS The new regulations come into effect from 21st March 2016 and therefore any offer issued and not accepted by a customer prior to this date will be subject to the MCD rules. New illustrations will have to be issued and new offers produced, making allowance for the statutory 7 day cooling off period prior to completion.

TRAINING & COMPETENCY The new directive sets out minimum standards for lenders and intermediaries involved in the mortgage process. Firms have until March 2017 to comply with requirements on knowledge and competency and until 21st March 2019 to stop using ‘professional experience’ as the basis to assess this. Intermediaries should ensure that the ‘Training and Competency’ requirements are understood and over time confirm to the society that they have complied with this part of the regulation.

NEW REGULATION This section explains where MCD has made the most changes to MCOB. FIRST & SECOND CHARGE LOANS Whilst the new legislation applies equally to both types of lending, Buckinghamshire Building Society only lends by way of a first charge mortgage and therefore this guide concentrates on this segment of the market.

FOREIGN CURRENCY LOANS MCD introduces a standard definition of a foreign currency mortgage and the consumer rights that have to be met by these providers. The definition of a Foreign currency mortgage under MCD is:   

where a mortgage is provided in a currency that is different to that in which an EU consumer resides and/or the customer receives the income or holds the assets from which the credit is to be repaid.

The Buckinghamshire Building Society will not be offering Foreign Currency Mortgages and therefore will require additional information when considering any Approval in Principle. In future enquiries we will need to know:    

The denomination of each of the applicants’ income - (particularly if working for a multinational company) The country in which all applicants will be living - (particularly if they are not occupying the property e.g. Buy to Lets) The source of funds for clearance of an interest only mortgage - (to ensure that this does not include sale of assets in another EU state such as a holiday home etc.) The purpose and any intended use of funds requested by way of further advances together with a full affordability assessment.

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BUY TO LET The FCA have introduced a new category of Buy to Let Mortgage which is regulated under MCD. This is defined as a ‘Consumer Buy to Let’ mortgage (CBTL) and all lenders and intermediaries offering these facilities need to apply and hold the relevant new FCA regulatory permissions. The Buckinghamshire Building society requires intermediaries to confirm that they hold the appropriate regulatory permissions and provide a customer declaration on the use of the property being mortgaged for all Buy to Let applications. The CBTL mortgage is defined as: A mortgage on a residential property which is not entered into by the borrower wholly or predominantly for the purposes of a business to be carried on by the borrower. It extends to a residential property that is the customer’s only BTL property that they have either previously occupied or is being rented to a ‘related’ person. A related person is defined as:  

The applicant Spouse or Partner (whether or not of the opposite sex) or The applicant’ Parent, brother, sister, child, grandparent or grandchild.

All other BTL properties are considered to either be a business buy to let or an investment property loan.

EARLY REPAYMENT MCD gives the customers the right to be able to repay a mortgage early either in part or wholly. Whilst there is no change to our mortgages, firms are reminded that they must disclose the implications of early repayment such as any repayment charge that will be detailed in our offer.

FINANCIAL PROMOTIONS PROMOTIONS RULES The new regulation re-enforces requirements of ‘Fair, clear and not Misleading’ communication but now also requires that where interest rates, the cost of loans or any other price information is included in any promotion a ‘Representative Example’ needs to be provided. This example will be shown in all product guides, website and any other advertisement that includes price information, and has been calculated in accordance with the rules. Intermediaries are reminded of these requirements which also extend to any business name and should not, for example, call themselves an ‘independent mortgage advisor’ unless its product range across the relevant market is unlimited.

RANGE OF PRODUCTS If intermediaries are not offering to the customer products from an unlimited range across the market its disclosure on product range must list the names of all mortgage lenders whose products it is offering.

INFORMATION FREE OF CHARGE Under the MCD a firm may not charge for providing disclosure material.

REMUNERATION Intermediaries must not remunerate its staff or appointed representatives in a way that prevents it from complying with the rules. February 2016 version 1.0

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Information as to whether the intermediary will receive commission from a mortgage lender or another third party and whether any commission is offset against any fees etc must be disclosed. All such fees must be advised to the lender to include within the APRC calculation.

KEY FACTS ILLUSTRATION CHANGES MCD introduces the requirement for a European Standardised Information Sheet (ESIS) which will replace the current Key Facts Illustration. The new form has to be adopted by all mortgage providers by 21st March 2019 but until then, under transitional arrangements, lenders may modify their existing illustration to reflect the new requirements. This modified KFI is known as the KFI+. The Buckinghamshire Building Society will be issuing the KFI+ in the interim period. This may mean that in comparing illustrations there could be some initial confusion as different providers fully adopt the new illustration changes over differing timelines. Additional information in the KFI+ to provide additional consumer protection is:  

The introduction of a new 7 day cooling off / Reflection period The requirement to provide a second (additional) APRC where the mortgage rate is variable utilizing a 20 year high so that consumers are aware of historic lending costs (and thereby the potential for future change etc) This data can either be based on relevant external reference rates or the bench mark rate set by the FCA. Buckinghamshire Building Society will use the FCA benchmark rate for illustrations.

OFFERS Under MCD consumers are to be afforded the right of a formally binding Offer with minimal withdrawal rights where false or inaccurate information has been provided or a material change in circumstances has occurred. We have to provide the customer with a seven day reflection period during which time the offer remains binding upon the lender but the consumer may make comparison and assess the implications of accepting the facility being offered. Customers may elect to accept the offer during this reflection period. Before the offer is made however, intermediaries are required to provide customers with ‘Adequate Explanations’ of the features of the mortgage and any ancillary products. We have included a borrower guide with explanations of our products and some mortgage terms, which should be used to either provide oral explanations or be printed and provided as an addendum to any illustrations provided by you to any customer introduced to ourselves. Please certify that this has been done for all applications received after 21st March 2016. If an application is to increase existing borrowing on a customers home, customers should also be advised of their ‘Alternative Financing Options’ even if these services are not offered by the intermediary themselves.

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All Products are subject to change or withdrawal at any time.

The Society reserves the right to reject any application.

All mortgages are subject to status and valuation.

The Society records phone calls for monitoring and training purposes.

Contact our Business Development Managers on:

Julie: 01494 879506 [email protected]

Stewart: 01494 877242 [email protected]

Or visit our website: www.bucksbs.co.uk/intermediaries

Buckinghamshire Building Society High Street Chalfont St Giles Bucks HP8 4QB Tel (Mortgage team direct): 01494 879517 Email: [email protected]

Buckinghamshire Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registration Number 206022.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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BORROWER’S GUIDE TO MORTGAGES AND ADEQUATE EXPLANATIONS OF TERMS This guide is an introduction to Buckinghamshire Building Society mortgages and explains the terms you will come across in relation to your loan. Specific terms and conditions including fees and charges apply to our mortgage products, which are detailed in the product guide or the Key Facts Illustration provided by your broker. TYPES OF MORTGAGE PRODUCTS OWNER OCCUPIED PROPERTIES Standard Variable Rate (SVR) The interest rate is variable for the term of the loan and may change at any time. One calendar month’s notice of any changes will be given in writing and such notices will include the new monthly repayment amount. You can make overpayments or repay the loan in full early without incurring a charge. Fixed Rate Interest charged is fixed for an initial period, and does not change until this period ends. Normally the rate then payable when the fixed term ends is our SVR, however you will be notified prior to this as there may be another deal that you can switch to. There will be an Early Repayment Charge during the fixed rate term. See the specific product guide or KFI+ for full details. Discount Rate This is a variable rate at a percentage discount from SVR, and the rate will move up or down in line with changes in the SVR. Normally the rate then payable when the discount term ends is our SVR, however you will be notified prior to this as there may be another deal that you can switch to. There will be an Early Repayment Charge during the discount term. See the specific product guide or KFI+ for full details. Base Rate Tracker A variable rate which tracks the Bank of England base rate and will move up or down in line with changes in this rate. The rate is set at a percentage above the base rate and will normally track the rate for the full term of the mortgage. You can make overpayments or repay the loan in full early without incurring a charge. Stepped Discount Rate This is similar to the Discount Rate and is variable at a percentage discount from SVR, however the percentage discount lowers each year that the stepped discount applies, e.g. 1.50% discount for the first year, 1.00% discount for the second year and so on. Normally the rate then payable when the discount term ends is our SVR, however you will be notified prior to this as there may be another deal that you can switch to. There will be an Early Repayment Charge during the discount term. See the specific product guide or KFI+ for full details. LETTING PROPERTIES Buy to Let This type of mortgage is for purchasing a property with the intention of letting it out under a rental agreement; and if neither you nor a family member are living in the property. Buy to let products can be fixed or variable rate and will depend on the products available at the time of application. Consumer Buy to Let These mortgages are for re-mortgaging a property that you or an immediate family member has lived in and you do not own other properties that are being let. Consumer Buy to let products can be fixed or variable rate and will depend on the products available at the time of application.

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TYPES OF BORROWER Borrowers who are employed or self-employed can normally choose any of our standard mortgage products for either a house purchase or a remortgage of their existing loan; however there are those borrowers whose income or credit is not standard, or who require a specialist type of mortgage. NON-STANDARD INCOME OR CREDIT These mortgages may be fixed or variable and are designed for borrowers whose income is not standard (e.g. mainly pension or savings income); or who may have previous credit issues. CONTRACTORS We offer mortgages for borrowers working on a contract or freelance basis, where the income used for affordability purposes is based on current and previous contract daily rates. SELF BUILD We have specific products designed for those looking to build their own home. The total amount of the mortgage is agreed at the outset and then drawn down in stages based on interim valuations of the completed work. SHARED OWNERSHIP For borrowers looking to start purchasing their housing association property in stages, making mortgage repayments to the Society and rental payments to the housing association.

REPAYMENT METHODS CAPITAL AND INTEREST Your monthly instalment will cover both interest on the outstanding loan and repayment of the capital sum borrowed over an agreed number of years. At the end of the term agreed the mortgage is paid off in full. The percentage of your repayment to the capital gradually increases over the term as the total amount of interest charged on the reducing balance becomes less each year. INTEREST ONLY Your monthly instalment will only cover the interest on the outstanding loan and therefore the balance outstanding will remain the same. This means that the original capital sum must be repaid at the end of the mortgage term. You will need to arrange a means of repaying the capital, which will usually involve an additional monthly payment to a third party. The following are suitable repayment vehicles that can be used to pay off the capital:       

Pension ISA Endowment Stocks & shares Other investments Second property Sale of property (provided that it is not in another EEA state)

REPAYMENT AND INTEREST ONLY A loan can be set up in two parts if required, one repayment and one interest only.

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ADEQUATE EXPLANATION OF TERMS Annual Percentage Rate of Charge (APRC) The Annual Percentage Rate of Charge enables you to compare the cost of different loans on a 'like for like' basis. Usually, the higher the APRC on a loan, the more you'll have to pay. The figure is calculated on the average loan size and repayment term of data gathered on the specific or similar type of mortgage. Capital The sum of money that is lent to you to purchase or remortgage a property. Interest is payable on the capital that is released to you. You will have to repay both the capital and the interest due to the lender by the end of your mortgage term. Completion This is the last stage in the purchase of a property. The legal documentation is finalised and the lender has sent the mortgage funds to your solicitor. Once your solicitor forwards the funds to the seller's solicitor the property is owned by you and you can move into your new home. Early Repayment Charge A charge that may be incurred if you repay your mortgage (in whole or in part) before the end of a specified time period. Details of any early repayment charges applicable to a product will be shown on the product guide and detailed in your key facts Illustration and mortgage offer. Equity The monetary difference between a property's actual value and the mortgage held against the property. If the property is worth less than the mortgage outstanding this will be described as 'negative equity'. Fees A number of fees will apply to any mortgage including fees paid to the broker and the lender, valuation fees, solicitors fees and possibly stamp duty. See the separate fees leaflet for full details. Specific fees for arranging your mortgage will be detailed on the Key Facts Illustration. Interest Rate This is the rate at which the interest charged on the mortgage is calculated. Our interest is calculated on the daily changing balance of your mortgage and applied to your account monthly. Joint and Several Liability An undertaking by two or more people to be responsible, either individually or jointly, for the mortgage and any other associated liabilities with the loan. Key Facts Illustration (KFI+) A KFI+ is a document produced by mortgage lenders which summarises all the important features of the mortgage and must be fair, clear and not misleading. It must be presented in a standard way, so you can check the cost and terms of the mortgage and compare it with other similar mortgages from the same lender or other lenders. Loan to Value (LTV) The loan to value represents the percentage of the value of the property which the borrower is seeking to borrow. For example, a property worth £150,000 with an outstanding mortgage of £75,000 = a 50% LTV (outstanding mortgage amount / property value x 100). Mortgage Offer This is the document that states that the lender is prepared to offer you a mortgage for the purchase or remortgage of a property. This document will give details of the exact amount of money that will be lent to you and on what terms. February 2016 version 1.0

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Overpayments Overpayments are payments made to the lender of more than the required monthly repayment amount and can be made to pay off a loan more quickly. Generally in fixed or discount rate schemes an Early Repayment Charge will apply which means you will either not be able to make any overpayments or you may only be able to pay a small amount more than your normal monthly repayment. Remortgage A remortgage is the process of moving your existing mortgage loan from one lender to another. Stamp Duty This is a tax payable on property purchases above a level set by the government. The amount depends on the purchase price of the property. Stamp duty may also be payable upon a remortgage where there is a transfer of ownership. Standard Variable Rate (SVR) The Society’s Standard Variable Rate is determined by its Board of Directors and can vary upwards and downwards. The SVR is generally the follow on rate on any fixed or discount scheme, although a new deal may be available when your fixed or discount term comes to an end. Title Deeds These are legal documents that show the ownership of the property. Transfer of Equity The process of adding or removing a party to or from a mortgage.

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