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Lloyds Banking Group bans foreign currency income on new lending

Lloyds Banking Group will stop lending to borrowers using foreign currency income to support a new mortgage or remortgage application across all its brands, from 28 September.

A foreign currency mortgage is defined in the Mortgage Credit Directive (MCD) as a mortgage that is either in a currency different to the customer’s income or assets from which the loan is to be repaid, or in a currency that differs from that of the country where the customer is resident.

The group has clarified that foreign currency income is any income other than Sterling received by a customer. It added that foreign currency income paid into a UK bank account and subsequently transferred to Sterling is still considered to be foreign currency.

Lloyds Banking Group will still accept a foreign currency income to support applications from existing customers for product transfers and further advances. New mortgage applications from existing customers who are redeeming their current mortgage and those wishing to port a product will still be considered.

A Lloyds Banking Group spokesperson said: “Many elements of the Mortgage Credit Directive are already practiced within the group and we are working to implement the changes necessary to comply within the appropriate timeframes. Delivering the requirements needed for compliance fits with our priority to provide great products and services for our customers, through a culture founded on the highest standards of responsible behaviour.”

Any new mortgage or remortgage application which includes an element of foreign currency income must be fully submitted by 8pm on 25 September 2015.

Ian Gray, senior partner at Large Mortgage Loans, said the move was ‘disappointing’ and described it as a ‘knee-jerk reaction’ to the upcoming directive.

Focusing on the Scottish Widows brand, Gray said: “This lender hold themselves out as being more flexible in its underwriting methods than its competitors. Many of our clients earn in a currency other than Sterling and there are times when it’s not too risky to borrow in Sterling.”

He acknowledged there were risks to earning in a different currency but a more sensible and intelligent approach to that risk could be taken.

“Most private banks we deal with will lend in this situation but they’ll take a 15% ‘haircut’ on the client’s annual income if it’s in a foreign currency,” said Gray. “This results in a lower mortgage than they’d have otherwise granted reducing the monthly payments and allowing more of a cushion in case Sterling strengthens against the currency they earn in.”

Following concerns raised by the respondents that the final MCD rules were unclear, the FCA added extra guidance to the Mortgage Conduct of Business rule book, MCOB 2A.3.2G, to make its expectations clearer on how firms offering foreign currency mortgages could protect customers against exchange rate risk.

It said firms can include a cap or risk warning, where a risk warning is sufficient to limit the exchange rate risk.

The rule itself, MCOB 2A.3.1R, requires firms to offer the customer the option to convert their foreign currency mortgage to an alternative currency or ensure there are other arrangements in place to limit the exchange rate risk.

Following the announcement of the rules, Nationwide stopped new mortgage lending to borrowers whose income was in a foreign currency on 8 April.

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