Welcome to TLT’s busy lenders’ monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation
This month in summary:
Focus on Northern Ireland
Focus on Scotland
Last month saw the Land Registry (LR) update Notice 1 (under rule 54C of the Land Registration Rules 2003) which deals with the general conditions and arrangements for the creation and registration of digital mortgages.
Some key requirements of the registration of digital mortgages through the Electronic Documents Registration Service are that:
The service combines simplicity for the borrower with the legal needs of the lender, in an accessible format.
On 13 February 2019, the Supreme Court overturned the Court of Appeal's decision in the case of Perry v Raleys Solicitors  UKSC 5.
The case provides clarification on how claims for loss of chance against negligent advisors will be assessed. The decision is relevant to any claim by a bank or lender who is considering taking legal action against third party suppliers who have failed to provide adequate advice on a potential litigation matter. Please read our article for further information.
The use of technology in dispute resolution has been on the rise over the last decade. It has recently been reported in Legal Futures that an online tool using artificial intelligence algorithms has been used to settle a civil dispute worth approximately £2,000 in less than an hour.
The disputing parties' claim was being dealt with through the money claims online system, which is targeted at simple disputes worth under £100,000. Legal Futures reports that the claim involved unpaid fees due to a trainer from a client following a personal counselling course and that the parties had previously failed to settle the matter using telephone mediation.
The online or 'robot' mediator is a Canadian dispute resolution tool called Smartsettle ONE which has been developed by ICan Systems. It was reportedly introduced to the disputing parties by Graham Ross, a mediator and online dispute resolution expert, as a free service. Parties use the system to make offers and counter-offers using a flag system which allows blind bids to be made, encouraging settlement without revealing a party's strategy.
This system may be useful in simple disputes and a further tool, called Smartsettle Infinity, could be used in slightly more complex matters, allowing conditions to be placed into the negotiations, such as paying by instalments.
This technology could certainly be a method of reducing the costs of simple and low value litigation and is one to watch for the near future.
In its latest newsletter, FOS has expressed concern at customers' struggle with household debt and has emphasised that this is linked to financial services debt with household bills being a common reason customers acquire regulated debt. "[B]usinesses' lack of empathy or flexibility" in collecting debt can exacerbate customers' debt issues. FOS is prepared to hold businesses accountable for any upset caused. The key to improvement is to hold constructive conversations with customers, followed up with effective actions.
Citizens Advice has highlighted that, while commercial creditors have improved through increased focus on customer engagement and needs, household debt collectors have deteriorated through, for example, the reliance on bailiffs. The way forward - with the implementation of "breathing space" - is for commercial and household debt collectors to collaborate with regulators and money advisors.
Examples of good practice are:
The top three issues in FOS debt collection complaints in 2018 were about: (1) excessive contact; (2) demand for repayment of debt that did not belong to the customer; and (3) miscalculation of repayment amounts. As a result of such complaints FOS has published 'best-practice' case studies which debt collectors should take into account.
The Government is consulting on a 1% surcharge on stamp duty land tax for non-UK residents in England and Northern Ireland.
In 2014 stamp duty moved away from the slab structure. Tax is now charged on the part of the purchase price falling within each threshold band. For example, 0% for the first £125,000, 2% on the value between £125,000 and £250,000, and so on.
The new proposal plans to add 1% to each threshold. This surcharge will apply on top of all existing stamp duty rates. For instance, non-UK residents buying a second property will be charged an additional 4% on the normal rates (3% for the second property surcharge and 1% for the non-UK resident surcharge). Non-UK resident first time buyers will qualify for first time buyer relief but a surcharge will also be added to that relief meaning that they would pay 1% of tax on the first £300,000 of the property value.
A non-UK resident is specified as a person who has spent less than 183 days in the UK in the last 12 months. Companies incorporated outside the UK would also be liable for the tax and there are some measures to prevent UK companies being used by non-UK nationals to avoid the surcharge.
The hope is that this surcharge will control house price inflation. However, the surcharge may be considered discriminatory to EU nationals and implementing the scheme may be dependent on the final form of Brexit.
The latest proposal to reform the conveyancing process is to reduce the number of failed property transactions by introducing a standard reservation agreement. The idea is that buyers will be required to make a financial commitment to purchasing the property and that there will be financial consequence to withdrawing from the transaction.
The Housing Minister, Heather Wheeler, believes that there is no reason why a reservation agreement cannot become standard practice and commented that the Government plans to run a trial later in the year.
The exact form of the reservation agreement is still being designed. As yet there are no firm proposals regarding the level of financial commitment expected from a buyer and what the financial consequences of withdrawing from a transaction would be.
From a lending perspective, having more of a financial commitment may lead to buyers seeking to ensure that they have their finance in place before committing to a reservation agreement. This may lead to an increase in requests for mortgages-in-principle.
We will report again once more details become available.
On 12 February 2019 the Government enacted the Tenant Fees Act 2019.
The effect of this Act is that from 1 June 2019 all fees paid by tenants to letting agents and landlords will be prohibited unless they fall within one of the below categories:
Each of these headings has detailed rules about what is allowed and what is restricted in order to protect tenants.
A breach of the Act can result in a fine of up to £5,000 for the first offence and £30,000 for subsequent offences.
Receivers planning to create new tenancy agreements as part of their letting strategy will need to make sure that they comply with the terms of the new Act.
Whilst the Act may not directly affect lenders, if a buy to let customer were to be fined for breach of the provisions, this would impact on that customer's finances and may affect their ability to service the mortgage account, particularly if the property is empty or the rental payments are lower than the monthly mortgage instalments.
Mortgage Solutions has conducted analysis into the growing demand for holiday lets and found that mortgage brokers need more lenders to offer Airbnb mortgages. Currently less than 10 lenders have entered this market but following demand from brokers, 2019 is likely to see a number of regional building societies and challenger banks start to offer Airbnb mortgages as borrowers require more flexibility.
Airbnb mortgages can be attractive for property investors as the property is run as a business as opposed to a buy-to-let, which has the benefit that mortgage interest can be offset against income before the payment of tax. Currently most lenders will only allow a borrower to let a property on an AST basis. With current restrictions within mainstream mortgages and the growing demand for Airbnb properties, landlords proposing to let their properties via Airbnb will need to re-mortgage to a more suitable product. 2019 is likely to see a number of new products hit the market to meet demand.
UK Finance's Mortgage Trend Updates for December 2018 have revealed that the number of first time buyers in the UK increased in 2018 by 1.9% from 2017. The number of first time buyers purchasing a property with a mortgage in 2018 was 370,000 – the highest number of first time buyers in the UK since 2006.
The increase in the number of first time buyers completing on property purchases in 2018 went against the trend in other areas of the market – for example, the number of home movers and Buy-to-Let purchases that completed in 2018 were lower than in 2017.
The increase in the number of first time buyers is likely to be due to a number of factors, including the range of competitive mortgage deals available and offers of assistance from the government, such as Help-to-Buy.
Throughout the following twelve months, the property market is likely to be impacted by Brexit, with some forecasters predicting a decrease in house price growth and a potential decrease in property values. With many homeowners indicating unwillingness to move home due to a lack of confidence in the current market, 2019 may provide opportunities for first time buyers to make a further impact on the number of property purchases in the UK market.
Lloyds and Barclays have both introduced new products aimed at providing first-time buyers with a 100% loan to get on the property market, but only for those with friends and family willing to help.
Lloyds’ new "Lend a Hand" mortgage will be fixed at 2.99% for three years. It requires a family member or friend to put 10% of the value of the loan as security into a savings account for a minimum of three years.
Barclays' "Family Springboard" offering is similar, with a rate of 3% fixed for three years, and also requires a deposit to be held in a savings account for that period. However the interest rate on the savings product is guaranteed to be 1.5% above base.
There have been murmurs in the industry for a while about new products along these lines, and the appetite is clearly there for customers.
It will be interesting to see how these perform over the coming years.
Our Financial Services Regulatory team regularly advise on the development and roll out of new loan products. If you would like more information or are considering a new product of your own, let us know if we can help.
The number of Retirement Interest Only Mortgages on offer has increased seven-fold in the last seven months alone, from 5 in July 2018 to a staggering 38 as of this month.
This follows the FCA's reclassification of these products as "standard mortgages" last year.
RIO Mortgages cater specifically to those who want to borrow later in life, perhaps to release equity to fund retirement or to help their children or loved ones get on the property ladder, and are one of a number of different equity-release products now hitting the market.
This is part of a wider shift to later-life products following the loosening of restrictions on the maximum age allowed at the end of a mortgage term that were put in place following the financial crisis.
RIO Mortgages in particular can provide a life-line for mortgage prisoners, or those who have interest-only mortgages on the cusp of maturity with no repayment vehicle in place.
The Nottingham Building Society recently conducted a survey asking retirees over 50 how they would use funds released in this way. 39% of respondees suggested they would be spending, rather than saving the funds – with many saying they holidayed three times a year, describing retirement as "the best time of their lives."
Continued growth is expected over the coming years, but it will be interesting to see what appetite lenders have for enforcement if products stop performing.
In the 2017 consultation regarding Cardiff City Council v Lee Flowers, the Civil Rules Procedure Committee highlighted that the processes of enforcing possession orders in the County Court and High Court were different and asked whether the rules should be aligned. The Committee have now launched a follow-up consultation on this topic.
Reforming possession processes is a hot topic at the moment. A consultation on whether a separate housing court should be set up ended in January and the Court Service themselves have an internal project aimed at freeing up bailiff time to reduce enforcement delays.
The latest consultation focuses mainly on the differences between court procedures. For instance, the notice that is given by the court to occupiers and whether permission should be required in the high court for enforcing non-mortgage related possession orders.
The Rules Committee are also looking at whether the process of transferring matters to the High Court should be revised.
At the moment, most possession claims and consequently most enforcements are dealt with by the County Court. Some County Court hearing centres have limited bailiff resources and this can lead to delays in enforcement. For these cases, transferring to the High Court is an option but the additional costs in using high court enforcement officers will need to be justifiable. In addition, the rules on transferring cases for enforcement are unclear. Lenders would therefore benefit from any clarification in this area.
The consultation runs until 2 May 2019 and we shall report again once the results are known.
The latest Quarterly House Price Index report by Ulster University reveals that the average house price in Northern Ireland grew by almost 5% in 2018.
The report indicates that the housing market in Northern Ireland is stable and affordable, and this is likely to be maintained in 2019.
Market conditions in the last 6 months of 2018 appeared to be more restrained, most likely as a result of Brexit looming, and the report reveals a general consensus that people are waiting until Brexit has been finalised before committing themselves to buying a new property.
However, the head of research of the NIHE, Karly Greene, is optimistic about 2019 despite the uncertainty of Brexit, stating “The local housing market was relatively buoyant in 2018 against a mixed background of political and economic conditions, and most of these factors carry over into 2019. All other things being equal, we would expect the relatively affordable and stable housing market conditions of recent years to continue".
As Michael Boyd, the Deputy Chief Executive and Finance Director of Progressive Building Society, emphasizes - despite the currently steady local housing market, it remains to be seen if Brexit will have an impact in Q2 of 2019.
The legislation relating to standard securities in Scotland is quickly becoming outdated. With the arrival of various new pieces of legislation, such as the Home Owner and Debtor Protection (Scotland) Act 2010, it is becoming increasing difficult to tie new legislation in with the pre-existing Conveyancing and Feudal Reform (Scotland) Act 1970.
In addition to new legislation coming into force, there has also be an increase in court decisions which have exposed the inadequacies of the legislation. Many of these court decisions, such as Royal Bank of Scotland v McConnell and Northern Rock (Asset Management) v Millar, highlight the uncertainties in the 1970 Act.
The Scottish Law Commission is undertaking a review which specifically looks at how standard securities are created, varied, transferred, extinguished and enforced both in residential and commercial contexts. As part of its aim of improving the law in this area, the Commission will review the law in England and Wales to ascertain what lessons can be learned.
The Commission commenced work on this project in 2018. They have established an expert advisory group which met twice in 2018. The Commission will be publishing two discussion papers for consultation, the first of which will be due in summer 2019. We can expect to see the second paper dealing with enforcement at the end of 2020. A single report and draft Bill are expected to be published in 2022.
Some of the comments that have been made thus far refer to clarifying the pre-action rules and the rules surrounding voluntary surrender, and to simplifying the rules on enforcement following the case of Royal Bank of Scotland v Wilson.
Chessie Da Parma
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.