This chapter applies to a firm in a category listed in column (1) of the table in MCOB 11.4.2 R in accordance with column (2) of that table.

This chapter applies:

1. (1)

   if a firmenters into a regulated mortgage contract or home purchase plan with a customer; or

2. (2)

   if a firm varies an existing regulated mortgage contract or home purchase plan; and

throughout the term of any regulated mortgage contract or home purchase plan which a firm has entered into.

1. (1)

   Except as provided in MCOB 11.6.3 R, MCOB 11.6.57 R (Interest roll-up mortgages) and MCOB 11.7 (Transitional arrangements):

   1. (a)

      before entering into, or agreeing to vary, a regulated mortgage contract or home purchase plan, a firm must assess whether the customer (and any guarantor of the customer's obligations under the regulated mortgage contract or home purchase plan) will be able to pay the sums due; and

   [Note: article 18(1) of the MCD]3

   1. (b)

      the firm must not enter into the transaction in (a) unless it can demonstrate that the new or varied regulated mortgage contract or home purchase plan is affordable for the customer (and any guarantor).

   [Note: article 18(5)(a) of the MCD]3

2. (2)

   In MCOB 11.6, references to payment of sums due means:

   1. (a)

      in the case of a regulated mortgage contract, the making of the payments to repay the sums advanced and interest reasonably expected to be accrued under the regulated mortgage contract; and

   [Note: article 18(6) of the MCD]3

   1. (b)

      in the case of a home purchase plan, the payment of sums due under the home purchase plan;

   in each case as they fall due.

3. (3)

   In MCOB 11.6, references to the customer must be read as referring also to any guarantor of the customer's obligations under the regulated mortgage contract, where the context permits.

1. (1)

   MCOB 11.6.2 R does not apply to:

   1. (a)

      entering into a new regulated mortgage contract or home purchase plan as a replacement for an existing regulated mortgage contract or home purchase plan between the customer and the firm (either as the original mortgage lender or home purchase provider or as the transferee of the existing contract), whether or not the new contract relates to the same property; 8

   2. (aa)

      entering into a new regulated mortgage contract as a replacement for an existing regulated mortgage contract, whether or not the new contract relates to the same property, where the original mortgage lender (or, where the existing contract has been transferred, the transferee):8

      1. (i)

         is not entering into regulated mortgage contracts with new customers; and8

      2. (ii)

         is in the same group as the mortgage lender under the new contract; or8

   3. (b)

      a variation of an existing regulated mortgage contract or home purchase plan;

   provided the conditions in (2) are satisfied.

2. (2)

   The conditions referred to in (1) are that:

   1. (a)

      the proposed new or varied regulated mortgage contract or home purchase plan would not involve the customer taking on additional borrowing or (for a home purchase plan, increasing the amount of finance provided under the plan) beyond the amount currently outstanding under the existing regulated mortgage contract or home purchase plan, other than to finance any product fee or arrangement fee for the proposed new or varied contract; and

      [Note: article 18(6) of the MCD]3

   2. (b)

      there is no change to the terms of the regulated mortgage contract or home purchase plan which is likely to be material to affordability.

3. (3)

   MCOB 11.6.2 R does not apply to a variation to the terms of a regulated mortgage contract or home purchase plan which:9

   1. (a)

      reduces (including to zero) the capital repayments required under a repayment mortgage for a period of no longer than six months;9

   2. (b)

      reverses (in full or in part) a term extension within six months of it taking effect; or9

   3. (c)

      is made solely for the purposes of forbearance where the customer has a payment shortfall, or in order to avoid a payment shortfall.9

4. (4)

   Paragraph (3)(a) only applies where the contract:9

   1. (a)

      remains a repayment mortgage after the variation (because the mortgage is still designed to be repaid in full over its term); 9

   2. (b)

      has not previously been varied in reliance on that paragraph; and9

   3. (c)

      is not a bridging loan or a second charge regulated mortgage contract.9

5. (5)

   Paragraph (3)(b) only applies where the contract:9

   1. (a)

      has not previously been varied in reliance on that paragraph; and9

   2. (b)

      is not a bridging loan or a second charge regulated mortgage contract.9

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract or is subject to the home purchase plan, or take account of an expected increase in property prices;

[Note: article 18(3) of the MCD]3

1. (2)

   must take full account of:

   1. (a)

      the income of the customer, net of income tax and national insurance; and, as a minimum

   2. (b)
      1. (i)

         the customer's committed expenditure; and

      2. (ii)

         the basic essential expenditure and basic quality-of-living costs of the customer's household;

[Note: article 20(1) of the MCD]3

1. (3)

   (if it is a mortgage lender) must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

2. (4)

   (if it is a mortgage lender) must take account of the impact of likely future interest rate increases on affordability, as set out in MCOB 11.6.18 R.

[Note: article 18(1) of the MCD]3

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account of the customer's income (in accordance with MCOB 11.6.5R (2)(a)) for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income declared by the customer for the purposes of the customer's application for the regulated mortgage contract or home purchase plan (or variation). The evidence, whether document-based or derived through the use of automated systems, must be of a type and for a period which is adequate to support each element of income that the firm is taking into account, and subject to appropriate anti-fraud controls; and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

For the purposes of a mortgage lender's or home purchase provider's assessment of whether the customer will be able to pay the sums due:

1. (1)

   the committed expenditure of a customer in MCOB 11.6.5R (2)(b)(i) is his credit and other contractual commitments which will continue after the regulated mortgage contract or home purchase plan (or variation) is entered into;

2. (2)

   the basic essential expenditure of a customer's household in MCOB 11.6.5R (2)(b)(ii) comprises expenditure for: housekeeping (food and washing); gas, electricity and other heating; water; telephone; council tax; buildings insurance; ground rent and service charge for leasehold properties; and essential travel (including to work or school); and

3. (3)

   the basic quality-of-living costs of a customer's household in MCOB 11.6.5R (2)(b)(ii) are its expenditure which is hard to reduce and gives a basic quality of life (beyond the absolute essential expenditure in (2)).

For the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm may generally rely on any evidence of income or information on expenditure provided by the customer unless, taking a common sense view, it has reason to doubt the evidence or information;

2. (2)

   in taking account of the customer's committed expenditure, a firm must take reasonable steps to obtain details of the customer's actual outstanding commitments; and

3. (3)

   in taking account of the basic essential expenditure and basic quality-of-living costs of a customer's household, a firm may obtain details of the actual expenditure. Alternatively, it may use statistical data or other modelled data appropriate to the composition of the customer's household, including the customer, dependent children and other dependents living in the household. If it uses statistical or other modelled data a firm must apply realistic assumptions to determine the level of expenditure of the customer's household.

If a firm is, or should reasonably be aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer during the term of the regulated mortgage contract or home purchase plan, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

1. (1)

   This rule applies where:

   1. (a)

      a purpose of a regulated mortgage contract or home purchase plan (or variation) is debt consolidation; and

   2. (b)

      for a first charge regulated mortgage contract, 4the customer is a credit-impaired customer.

2. (2)

   Subject to (3), where each of the conditions in (1) is satisfied and, if the debts which are to be repaid using the sums raised by the regulated mortgage contract or home purchase plan (or variation) were not repaid, the transaction would not be affordable for the customer, the firm must take reasonable steps to ensure that, on completion of the transaction, those debts are actually repaid.

3. (3)

   The requirement in (2) does not apply if the firm has assumed that the customer's existing debts which are to be repaid using the sums raised by the regulated mortgage contract or home purchase plan (or variation) will not in fact be repaid and, accordingly, include them as committed expenditure in the affordability assessment for the customer.

1. (1)

   Under MCOB 11.6.5R (4), in taking account of likely future interest rate increases for the purposes of its assessment of whether the customer will be able to pay the sums due, a mortgage lender must consider the likely future interest rates over a minimum period of five years from the expected start of the term of the regulated mortgage contract (or variation), unless the interest rate under the regulated mortgage contract is fixed for a period of five years or more from that time, or for the duration of the regulated mortgage contract (or variation), if less than five years.

2. (2)

   In coming to a view as to likely future interest rates, a2mortgage lender must have regard to:2

   22
   1. (a)

      market expectations; and2

   2. (b)

      any prevailing Financial Policy Committee recommendation on appropriate interest-rate stress tests;2

   and must be able to justify the basis it uses by reference to (a) and (b).2

3. (3)

   For the purposes of this rule, even if the basis used by the mortgage lender in (2) indicates that interest rates are likely to fall, or to rise by less than 1%, during the first five years of the regulated mortgage contract (or variation), a mortgage lender must assume that interest rates will rise by a minimum of 1% over that period.

1. (1)

   3Under MCOB 11.6.5R (4), in taking account of likely future interest rate increases for the purposes of its assessment of whether the customer will be able to pay the sums due, a second charge lender must also consider the likely future interest rates of any regulated mortgage contract in existence at the time of the assessment and remaining in existence after the relevant second charge regulated mortgage contract has been entered into.

2. (2)

   The second charge lender must, at a minimum, base its assessment under (1) on the balance outstanding of any regulated mortgage contract relevant under (1).

A firm must put in place, and operate in accordance with, a written policy (which may be contained in more than one document), approved by its governing body, setting out the factors it will take into account in assessing a customer's ability to pay the sums due. The policy must address the following matters:

1. (1)

   how income and expenditure is to be assessed, including (except as provided in MCOB 11.6.32R (1) and MCOB 11.6.39R (1)):

   1. (a)

      details of the types of income which are acceptable;

   2. (b)

      the proportion of different income streams which is acceptable;

   3. (c)

      how variations in income over time, of which the firm is aware, are to be considered;

   4. (d)

      what is acceptable evidence of income (including the time period to be covered by the evidence); and

   5. (e)

      how committed expenditure, basic essential expenditure and basic quality-of-living costs are taken into account when assessing affordability;

2. (2)

   how future interest rates are taken into account when assessing affordability;

3. (3)

   the calculations used to determine whether the regulated mortgage contract or home purchase plan is affordable;

4. (4)

   how the mortgage lender's or home purchase provider's anti-fraud controls are incorporated into affordability assessments;

5. (5)

   how the mortgage lender's or home purchase provider's method of calculating the size of the advance for each customer, based on a consideration of the customer’s income and expenditure, is to be monitored, including the timing of reviews and key performance indicators to be used (see MCOB 11.6.22 R (Monitoring));

6. (6)

   the actions to be taken if the mortgage lender's or home purchase provider's calculation method, referred to in (5), does not perform as expected;

7. (7)

   how regular audits of compliance with the mortgage lender's or home purchase provider's responsible lending or financing policy established in accordance with this rule are to be undertaken (as required by MCOB 11.6.24 R);

8. (8)

   how the record keeping requirements in MCOB 11.6.60 R are to be met;

9. (9)

   (if applicable) the matters required by MCOB 11.6.50 R (Interest-only policy); and

10. (10)

    (if applicable) how the firm will apply the rules in MCOB 11.7 (Transitional arrangements) so as to permit exceptions to its procedures for affordability assessments, to include arrangements for use of management information to monitor its application of those exceptions.

[Note: article 18(2) of the MCD]3

3An MCD mortgage lender must keep a record of the valuation and types of immovable property accepted as a security, as well as the related mortgage underwriting policies used.

A firm must put in place, and be able to demonstrate that it has, robust systems and controls (including the use of management information and key performance indicators) to monitor the effectiveness of its affordability assessments, including in preventing payment difficulties.

A firm must ensure that its compliance with the responsible lending or financing policy required by MCOB 11.6.20 R is reviewed at least once per calendar year:

1. (1)

   in any case where the firm has an internal audit function or outsourced equivalent, by that function; and

2. (2)

   in any other case, by the firm's internal compliance function or an outsourced equivalent.

Where a regulated mortgage contract is solely for a business purpose, a firm may opt to apply MCOB 11.6.26 R to MCOB 11.6.31 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G.

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract, or take account of an expected increase in property prices;

2. (2)

   must:

   1. (a)

      where the repayments will be made from the resources of the customer:

      1. (i)

         take full account of the income, net of income tax and national insurance, or net assets (or both) of the customer; and the customer’s committed expenditure; and

      2. (ii)

         take account, in general terms as a minimum, of the basic essential expenditure and basic quality-of-living costs of the customer’s household; and

   2. (b)

      where the repayments will be made from the financial resources of the business, take full account of the strength of those resources;

3. (3)

   in a case falling within (2)(b), if the customer is relying on the business for his personal income, must as a minimum consider in general terms whether the business can support the customer's basic essential expenditure and basic quality-of-living costs;

4. (4)

   must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

5. (5)

   must take account of the impact of likely future interest rate increases on affordability.

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account (in accordance with MCOB 11.6.26R (2)) of the customer's income or net assets (or both) and the resources of the business for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income or net assets (or both) of the customer and the resources of the business, as declared by the customer for the purpose of the customer's application for the regulated mortgage contract (or variation); and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

In MCOB 11.6.26 R, for the purposes of taking full account of committed expenditure and taking account in general terms of basic essential expenditure and basic quality-of-living costs, the meaning of those phrases is as set out in MCOB 11.6.10 R.

If a firm is, or should reasonably be aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer, or the resources of the business, during the term of the regulated mortgage contract, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

Where a firm chooses, in accordance with MCOB 11.6.25 R, to apply the provisions of MCOB 11.6.26 R to MCOB 11.6.31 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G:

1. (1)

   its policy in MCOB 11.6.20R (1) need not address each of the matters prescribed in sub-paragraphs (a) to (e) of that rule;

2. (2)

   MCOB 11.6.23 G does not apply; and

3. (3)

   in each case the record-keeping requirements in MCOB 11.6.60R (2)(a) to (d) apply only to the extent relevant, but the record in MCOB 11.6.60R (1) must also include, to the extent relevant:

   1. (a)

      the customer's assets and the evidence relied on to assess them; and

   2. (b)

      the details considered in relation to the resources of the business.

Where a regulated mortgage contract is for a high net worth mortgage customer, a firm may opt to apply MCOB 11.6.34 R to MCOB 11.6.38 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G.

When assessing for the purposes of MCOB 11.6.2 R whether a customer will be able to pay the sums due, a firm:

1. (1)

   must not base its assessment of affordability on the equity in the property which is used as security under the regulated mortgage contract, or take account of an expected increase in property prices;

[Note: article 18(3) of the MCD]3

1. (2)

   must:

   1. (a)

      take full account of the income, net of income tax and national insurance, or net assets (or both) of the customer; and the customer's committed expenditure; and

   2. (b)

      take account, in general terms as a minimum, of the basic essential expenditure and basic quality-of-living costs of the customer's household;

[Note: article 20(1) of the MCD]3

1. (3)

   must assess affordability on the basis of both repayment of capital and payment of interest over the term, except where lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1); and

2. (4)

   must take account of the impact of likely future interest rate increases on affordability.

For the purposes of MCOB 11.6.2 R, a firm must not rely on a general declaration of affordability by the customer or his representative.

In taking account of the customer's income or net assets (or both) (in accordance with MCOB 11.6.34R (2)(a)) for the purposes of its assessment of whether the customer will be able to pay the sums due:

1. (1)

   a firm must obtain evidence of the income or net assets (or both) declared by the customer for the purpose of the customer's application for the regulated mortgage contract (or variation); and

2. (2)

   a firm must not accept self-certification of income by the customer, and the source of the evidence in (1) must be independent of the customer.

In MCOB 11.6.34 R, for the purposes of taking full account of committed expenditure and taking account in general terms of basic essential expenditure and basic quality-of-living costs, the meaning of those phrases is as set out in MCOB 11.6.10 R.

If a firm is, or should reasonably be, aware from information obtained during the application process, that there will, or are likely to, be future changes to the income and expenditure of the customer during the term of the regulated mortgage contract, the firm must take them into account when assessing whether the customer will be able to pay the sums due for the purposes of MCOB 11.6.2 R.

Where a firm chooses, in accordance with MCOB 11.6.33 R, to apply the provisions of MCOB 11.6.34 R to MCOB 11.6.38 R in place of MCOB 11.6.5 R to MCOB 11.6.19 G:

1. (1)

   its policy in MCOB 11.6.20R (1) need not address each of the matters prescribed in sub-paragraphs (a) to (e) of that rule;

2. (2)

   MCOB 11.6.23 G does not apply; and

3. (3)

   in each case the record-keeping requirements in MCOB 11.6.60R (2)(a) to MCOB 11.6.60R (2)(d) apply only to the extent relevant, but the record in MCOB 11.6.60R (1) must also include, to the extent relevant, the customer's assets and the evidence relied on to assess them.

1. (1)

   A mortgage lender may only enter into an interest-only mortgage, or switch a repayment mortgage onto an interest-only basis for all or part of its term, if:

   1. (a)

      it has evidence that the customer will have in place a clearly understood and credible repayment strategy; and

   2. (b)

      as far as it is reasonably able to assess at that time, the repayment strategy has the potential to repay the capital borrowed and any interest reasonably expected to be accrued under the interest-only mortgage.

2. (2)

   In MCOB 11.6, a reference to an interest-only mortgage is to be read as including any regulated mortgage contract which includes an interest-only period or where part of the sum is advanced on an interest-only basis.

3. (3)

   A mortgage lender must not accept speculative repayment strategies for the purposes of (1).

4. (4)

   Paragraph (1) does not apply in respect of a variation to the terms of a regulated mortgage contract made in accordance with MCOB 11.6.3R(3)(a).9

MCOB 11.6.41R (1) does not prevent a mortgage lender, when appropriate, from making a temporary concession, by which he accepts payment of interest only, with a customer who is in arrears or has a payment shortfall, or is at risk of arrears or a payment shortfall, on a regulated mortgage contract.

7 MCOB 11.6.46E(3)(b) does not apply in relation to a retirement interest-only mortgage.

For the purposes of MCOB 11.6.2 R, where a mortgage lender is lending under an interest-only mortgage in accordance with MCOB 11.6.41R (1), it may assess affordability on the basis of payment of interest only over the term (plus repayment of such capital as may be due to be repaid over the term). If it does so, it must consider as part of the customer's committed expenditure under MCOB 11.6.5R (2)(b)(i) (or the equivalent alternative provision for transactions with high net worth mortgage customers or solely for business purposes) the cost to the customer of the repayment strategy (unless the mortgage is a retirement interest-only mortgage)7.

1. (1)

   This rule applies in relation to all interest-only mortgages which a mortgage lenderenters into on or after 26 April 2014 except:

   1. (a)

      lifetime mortgages7;

   2. (aa)

      retirement interest-only mortgages;7

   3. (b)

      bridging loans; and

   4. (c)

      any other case where the repayment of capital borrowed and, if applicable, interest accrued, is certain.

2. (2)

   Except as set out in (3), a mortgage lender must carry out a review (as a minimum, once) during the term of the mortgage, in which contact is made with the customer, to check that the customer'srepayment strategy is still in place, and that it is still reasonable to expect that the repayment strategy has the potential to repay the capital borrowed and, where applicable, pay the interest reasonably expected to be accrued under the interest-only mortgage. The review must be carried out at a stage of the term when, if the repayment strategy is not in place, or not adequate, there is likely to be sufficient time prior to the end of the term for the customer to take appropriate steps to remedy the situation.

3. (3)

   The review in (2) is not required in any case where, despite reasonable efforts to contact the customer, the mortgage lender has been unable to do so.

4. (4)

   Following the review in (1), where appropriate the mortgage lender must take reasonable steps to discuss with the customer what may be done to address the situation.

A mortgage lender which enters intointerest-only mortgages (unless they are only lifetime mortgages) must include in the policy which is required by MCOB 11.6.20 R (Responsible lending and financing policy) a policy on interest-only mortgages, setting out its processes and procedures for ensuring compliance with MCOB 11.6.41R (1) and for safeguarding the interests of customers during the term of interest-only mortgages. This policy must include:

1. (1)

   details of the mortgage lender's plans for lending by way of interest-only mortgages, including its planned volumes of lending on that basis over a specified period, and provision for reviewing the actual volumes of lending on that basis, including the timing and method of review;

2. (2)

   specification of the types of repayment strategy which will be considered acceptable, and the evidential requirements and other controls which will be applied to ensure that only such types will be accepted, including the controls to be applied where the repayment strategy is the sale of the property which is the subject of the regulated mortgage contract;

3. (3)

   the procedures for checking the existence and adequacy of the repayment strategy in line with the policy, including questions to be asked of the customer;

4. (4)

   the arrangements for monitoring and auditing compliance with the policy, processes and procedures (see MCOB 11.6.22 R and MCOB 11.6.24 R (Monitoring)); and

5. (5)

   the process for the review required by MCOB 11.6.49 R which, as a minimum:

   1. (a)

      prescribes the timing of the review;

   2. (b)

      prescribes the content of the review, including the questions to be asked of the customer and the actions to be taken if the customer proves difficult to contact or otherwise does not co-operate with the review;

   3. (c)

      sets out how it is to be decided whether the customer’s repayment strategy meets the criteria in MCOB 11.6.49R (2); and

   4. (d)

      sets out the actions which will be appropriate to be considered during the discussions in MCOB 11.6.49R (2), depending on the circumstances of the customer.

Except in relation to a secured overdraft which is solely for a business purpose or is with a high net worth mortgage customer:

1. (1)

   when considering extending the term of a bridging loan, a mortgage lender must comply with MCOB 11.6.2 R as if the bridging loan were a new loan;

2. (2)

   where MCOB 11.6.2 R does not apply in relation to extending the term of a bridging loan (because the bridging loan is an interest roll-up mortgage, and therefore MCOB 11.6.57 R applies), the mortgage lender must consider with the customer, before he commits himself to extend the term, the impact of the extension on the customer's remaining equity in the property which is the subject of the bridging loan; and

3. (3)

   a firm must not agree to extend the term of a bridging loan unless the customer has made a positive choice to do so.

The requirements in MCOB 11.6.2 R (and any Handbook provisions applicable only to that rule) do not apply in relation to an interest roll-up mortgage, or to the type of lifetime mortgage described in MCOB 9.4.132AR6.

A mortgage lender may not enter into an interest roll-up mortgage, or vary an existing regulated mortgage contract so that it becomes an interest roll-up mortgage, unless it is:

1. (1)

   a lifetime mortgage; or

2. (2)

   a bridging loan; or

3. (3)

   a loan to a high net worth mortgage customer; or

4. (4)

   a loan solely for business purposes; or3

5. (5)

   a shared equity credit agreement.3

1. (1)

   A firm must make, in paper or electronic form, an adequate record of the steps it takes to comply with the rules in this chapter in relation to each customer.

2. (2)

   The record in (1) must include the information taken into account in each affordability assessment, so that it is possible to understand from the record the basis of the mortgage lender's or home purchase provider's lending or financing decision, including (except as provided in MCOB 11.6.32R (3) and MCOB 11.6.39R (3)):

   1. (a)

      the customer's income, including, where relevant, a breakdown of the different income types;

   2. (b)

      the customer's committed expenditure;

   3. (c)

      the basic essential expenditure and basic quality-of-living costs of the customer's household (whether actual expenditure for that household or assumed expenditure from statistical or other modelled data, including information to show why the assumed data is appropriate to that customer's household);

   4. (d)

      the evidence relied on to assess income and expenditure;

   5. (e)

      the rate or assumptions used to test affordability against likely future interest rate rises;

   6. (f)

      the repayment type and term of the regulated mortgage contract, or the term of the home purchase plan; and

   7. (g)

      the calculation used to determine whether the regulated mortgage contract, home purchase plan is (or, where applicable, following the variation, remains) affordable for the customer.

3. (3)

   In relation to interest-only mortgages, the record in (1) must include:

   1. (a)

      the reasons for each decision to offer an interest-only mortgage to a customer;

   2. (b)

      the evidence of the customer'srepayment strategy and, where applicable, its cost;

   3. (c)

      details of the firm's attempts to contact the customer where required by MCOB 11.6.49 R; and

   4. (d)

      the outcome of each review required by MCOB 11.6.49 R (whether conducted once during the term of the interest-only mortgage or more frequently).

4. (4)

   In relation to the extension of the term of a bridging loan which falls within MCOB 11.6.55 R, the record in (1) must include:

   1. (a)

      the customer's positive choice to extend the term;

   2. (b)

      the reasons for the decision to extend the term; and

   3. (c)

      the evidence of the customer'srepayment strategy and its cost.

5. (5)

   A firm must retain the records required by (1) to (4) for the term of the regulated mortgage contract or home purchase plan.

6. (6)

   Where a firm enters into or varies a regulated mortgage contract or home purchase plan under MCOB 11.7 (Transitional arrangements), it must keep, for the term of the contract or plan, a record of:

   1. (a)

      the outstanding balance on the existing contract or plan;

   2. (b)

      the cost of the repairs or maintenance work to the property, where relevant;

   3. (c)

      any product fee or arrangement fee financed by any additional borrowing taken on under the contract or increase in the amount of finance provided under the plan; and

   4. (d)

      the rationale for each decision made to enter into or vary a regulated mortgage contract or home purchase plan under MCOB 11.7 (Transitional arrangements), including why the firm considered it to be in the customer's best interests.

7. (7)

   A firm must make, and keep up to date, an adequate record of the policy required by MCOB 11.6.20 R. When the policy is changed, a record of the previous policy must be retained for so long as any regulated mortgage contract or home purchase plan to which it was applicable remains outstanding.

When considering entering into a first charge regulated mortgage contract2 or varying a first charge regulated mortgage contract2 or home purchase plan, a firm need not apply the rules in MCOB 11.6.2 R to MCOB 11.6.18 R inclusive (as modified by MCOB 11.6.25 R to MCOB 11.6.31 R and MCOB 11.6.33 R to MCOB 11.6.38 R, where applicable) if it has established, acting reasonably, that the following conditions are satisfied:

1. (1)

   the customer has:

   1. (a)

      an existing first charge regulated mortgage contract2 (whether or not entered into on or after 31 October 2004) with the firm2 or home purchase plan (whether or not entered into on or after 6 April 2007) which was in existence prior to 26 April 2014; or

      2
   2. (b)

      an existing first charge regulated mortgage contract with the firm2 or home purchase plan which was entered into in reliance on, and in compliance with, MCOB 11.7;

      2
2. (2)

   subject to MCOB 11.7.2 R, the proposed regulated mortgage contract or home purchase plan, or variation, would not involve the customer taking on additional borrowing (or, for a home purchase plan, increasing the amount of finance provided under the plan) beyond the amount currently outstanding under the existing regulated mortgage contract or home purchase plan, other than to finance any product fee or arrangement fee for the proposed new or varied contract;

3. (3)

   the proposed transaction would be in the customer's best interests; and

4. (4)

   the customer has not, after 26 April 2014 increased the size of the advance under the existing regulated mortgage contract or home purchase plan other than to finance any relevant product fee or arrangement fee in relation to, or the cost of essential repairs or maintenance to the property which is the subject of, that regulated mortgage contract or home purchase plan.

The condition in MCOB 11.7.1R (2) does not apply if each of the following conditions is satisfied:

1. (1)

   the firm is the mortgage lender or home purchase provider under the existing regulated mortgage contract or home purchase plan in MCOB 11.7.1R (1);

2. (2)

   the value of the property which is the subject of the regulated mortgage contract or home purchase plan is at risk if repairs or maintenance work to the property are not carried out;

3. (3)

   the funds generated by the additional borrowing or increase in finance provided are to be used to carry out the repairs or maintenance work; and

4. (4)

   the firm has obtained credible evidence which demonstrates that the additional borrowing or increase in finance are no more than the cost of the repairs or maintenance work.

5. (5)

   the proposed transaction is:2

   1. (a)

      the variation of an existing non-MCDfirst charge regulated mortgage contract,

   2. (b)

      the entry into a non-MCDfirst charge regulated mortgage contract, or

   3. (c)

      a home purchase plan or variation of a home purchase plan.

1. (1)

   When considering entering into a first charge regulated mortgage contract which is an interest-only mortgage2 or varying a first charge regulated mortgage contract which is2 an interest-only mortgage, a mortgage lender need not apply the rules in MCOB 11.6.41R (1), MCOB 11.6.49 R, MCOB 11.6.50 R and MCOB 11.6.60R (3) if the conditions in MCOB 11.7.1 R) are satisfied, and if it has established, acting reasonably, that the existing regulated mortgage contract in MCOB 11.7.1R (1) is an interest-only mortgage.

2. (2)

   Where only part of the sum advanced under the existing regulated mortgage contract is on an interest-only basis, (1) applies, but only to that part.

2Where a firm has elected to apply any of MCOB TPs 22, 24, 26, 28, 30, 32, 34, 36, 38 or 40 in MCOB TP 1.1, any first charge regulated mortgage contract they propose to enter into between 21 September 2015 and 21 March 2016 is not to be regarded as an MCD regulated mortgage contract for the purposes of this chapter.

1. (1)

   1Subject to (2), this section applies to a firm in relation to a customer who:

   1. (a)

      is a borrower under a regulated mortgage contract (“the existing regulated mortgage contract”), whether with that firm or a different firm; and

   2. (b)

      wishes to enter into a new regulated mortgage contract (“the proposed regulated mortgage contract”) with that firm to replace the existing regulated mortgage contract.

2. (2)

   But this section only applies if:

   1. (a)

      the proposed regulated mortgage contract would not involve the customer borrowing:

      1. (i)

         a capital amount greater than that outstanding under the existing regulated mortgage contract at the date of the customer’s application for the proposed regulated mortgage contract; or

      2. (ii)

         where a purpose of the proposed regulated mortgage contract is to replace two or more existing regulated mortgage contracts, a capital amount greater than the cumulative capital amount outstanding under those contracts at that date;

      disregarding any increase that is exclusively for the purpose of financing a product fee or arrangement fee for the proposed regulated mortgage contract or a fee charged by a mortgage intermediary for arranging or advising on regulated mortgage contracts in relation to the proposed regulated mortgage contract;

   2. (b)

      the proposed regulated mortgage contract is to be secured on the same property as the existing regulated mortgage contract;

   3. (c)

      on the date on which the customer applies for the proposed regulated mortgage contract:

      1. (i)

         there is no sum that has become due under the terms of the existing regulated mortgage contract that constitutes a payment shortfall; and

      2. (ii)

         at no point in the period of 12 months ending on that date has there been a sum that has become due under the terms of the existing regulated mortgage contract that constituted a payment shortfall;

   4. (d)

      the written policy required by MCOB 11.6.20R (responsible lending policy) addresses how the firm will apply the rules in this section; and

   5. (e)

      the firm has and operates an internal switching policy (see MCOB 11.9.12R).

3. (3)

   For the purposes of this section, linked borrowing which is linked to an existing regulated mortgage contract is to be treated as if it were an existing regulated mortgage contract.

1 MCOB 11.9.14R (notice to customers) also applies to a firm that has permission for administering a regulated mortgage contract.

1. (1)

   1A firm may elect that the modifications to the rules in MCOB specified in (2) are to apply in relation to the proposed regulated mortgage contract. The firm may not elect that only some of those modifications apply in relation to the proposed regulated mortgage contract but not others.

2. (2)
   1. (a)

      MCOB 11.6.2R does not apply, but 11.9.5R applies in its place.

   2. (n)

      MCOB 11.6.3R and 11.6.4E do not apply.

   3. (c)

      MCOB 11.6.5R and 11.6.6R do not apply.

1. (1)

   1The firm must not enter into the proposed regulated mortgage contract unless that contract is more affordable for the customer (and any guarantor) than the existing regulated mortgage contract.

2. (2)

   The proposed regulated mortgage contract is more affordable than the existing regulated mortgage contract if:

   1. (a)

      the aggregate amount of:

      1. (i)

         the monthly payments due from the customer under that contract in respect of any discounted or introductory period, or (where there is no discounted or introductory period) in respect of the term of the proposed regulated mortgage contract; and

      2. (ii)

         any product fee or arrangement fee due from the customer in relation to that contract, and any fee charged by a mortgage intermediary for arranging or advising on regulated mortgage contracts in relation to that contract, which the customer intends to pay without including it in the amount being lent under the proposed regulated mortgage contract;

      is less than the aggregate amount due from the customer under the existing regulated mortgage contract (or all the existing regulated mortgage contracts, if more than one) in respect of the proposed regulated mortgage contract’s discounted or introductory period or (where there is no discounted or introductory period) in respect of the term of each existing regulated mortgage contract;

3. (b)

   the monthly payment that was due from the customer under the existing regulated mortgage contract (or the aggregate of the monthly payments due under all the existing regulated mortgage contracts, if more than one) in each of the 12 months before the date on which the customer applies for the proposed regulated mortgage contract, ignoring any atypical payments, was greater than:

   1. (i)

      the typical monthly payment which would be due from the customer under the proposed regulated mortgage contract in any discounted or introductory period; or

   2. (ii)

      (where there is no discounted or introductory period) the typical monthly payment which is expected to be due for the term of the proposed regulated mortgage contract; and

4. (c)

   the interest rate applicable under the proposed regulated mortgage contract:

   1. (i)

      in respect of any discounted or introductory period; or

   2. (ii)

      (where there is no discounted or introductory period) that which is expected to apply during the term of the contract;

   is lower than the interest rate currently applicable under the existing regulated mortgage contract (or each existing regulated mortgage contract, if more than one).

1. (1)

   1A firm may elect that the modifications to the rules in MCOB specified in (2) are to apply in relation to the proposed regulated mortgage contract. The firm may not elect that only some of those modifications apply in relation to the proposed regulated mortgage contract but not others.

2. (2)
   1. (a)

      MCOB 11.6.8R, 11.610R and 11.6.12R (income and expenditure) do not apply.

   2. (b)

      MCOB 11.6.14R (future changes to income and expenditure) does not apply, but if the term of the proposed regulated mortgage contract extends beyond the date on which the customer (or, where there are joint borrowers, one of them) expects to retire or, where that date is not known, the date on which the customer will reach the state pension age, the firm must consider whether the customer’s income beyond that date would be sufficient to enable them to meet their commitments under the contract.

   3. (c)

      MCOB 11.6.18R (considering the effect of future interest rate rises) does not apply.

1. (1)

   1A firm may elect that all of 11.6.41R, 11.6.43R, 11.6.46E, 11.6.46AR, 11.6.48R and 11.6.50R do not apply in relation to the proposed regulated mortgage contract.

2. (2)

   But a firm may not make an election under (1) if:

   1. (a)

      the existing regulated mortgage contract is a repayment mortgage and the proposed regulated mortgage contract is an interest-only mortgage; or

   2. (b)

      under the terms of the proposed regulated mortgage contract, the capital amount that will be outstanding at the end of that contract may be higher than that which would be outstanding at the end of the existing regulated mortgage contract (or the aggregate of that which would be outstanding at the end of each existing regulated mortgage contract, if more than one).

1. (1)

   1This rule applies if a firm makes an election under any of the following rules:

   1. (a)

      MCOB 11.9.4R (assessment of affordability);

   2. (b)

      MCOB 11.9.7R (assessment of income and expenditure);

   3. (c)

      MCOB 11.9.9R (interest-only mortgages).

2. (2)

   The firm must provide the customer with an explanation which indicates:

   1. (a)

      what steps the firm has taken to ascertain that the proposed regulated mortgage contract is more affordable than the existing regulated mortgage contract; and

   2. (b)

      how the steps it has taken differ from the steps it would have taken under MCOB 11.6 if the firm had not applied rules in this section.

3. (3)

   The firm must accompany the explanation with a warning (as relevant to the individual case) that:

   1. (a)

      interest rates may increase and the customer could end up paying a higher interest rate than they are currently paying under the existing regulated mortgage contract, even though the firm has assessed that the proposed regulated mortgage contract is currently more affordable;

   2. (b)

      the firm’s assessment that the proposed regulated mortgage contract is currently more affordable has not taken into account any early repayment charges that the customer may incur in relation to repaying their existing regulated mortgage contract; and

   3. (c)

      where the term of the proposed regulated mortgage contract is to end later than the term of the existing regulated mortgage contract, the customer may end up paying more in interest overall as a result of entering into the proposed regulated mortgage contract.

4. (4)

   The firm must provide the explanation and the warning:

   1. (a)

      in a durable medium; and

   2. (b)

      no later than the firm provides the customer with an offer document.

5. (5)

   The firm need not provide an explanation or a warning under this rule if a mortgage intermediary has already provided the explanation and the warning to the customer in relation to the proposed regulated mortgage contract.

1. (1)

   1An internal switching policy is a policy which:

   1. (a)

      is made or approved by the governing body of the firm; and

   2. (b)

      commits or obliges the firm:

      1. (i)

         to permit an eligible customer to enter into a more affordable regulated mortgage contract (see MCOB 11.9.5R(2)); and

      2. (ii)

         to apply such of the rules in this section as may be necessary to enable that customer to enter into that contract (though the firm may apply other rules in addition if it wishes), or to rely on MCOB 11.6.3R or MCOB 11.7 (if relevant) to enable that customer to enter into that contract.

2. (2)

   For the purposes of an internal switching policy, a customer must be eligible if:

   1. (a)

      the firm has entered into the existing regulated mortgage contract as the lender;

   2. (b)

      the firm chose to apply one or more of the rules in this section in relation to the existing regulated mortgage contract;

   3. (c)

      the customer wishes to enter into a more affordable regulated mortgage contract with the firm (see MCOB 11.9.5R(2)); and

   4. (d)

      the customer meets the conditions in MCOB 11.9.1R(2)(c)(i) and (ii).

1. (1)

   1For the purpose of this rule, a customer is a notifiable customer if, when the firm makes the determination required by this rule:

   1. (a)

      the customer meets the conditions in MCOB 11.9.1R(2)(c)(i) and (ii), and there is no fee or charge which has become payable under the regulated mortgage contract and remains unpaid beyond the date on which it was due to be paid;

   2. (b)

      the customer’s regulated mortgage contract is:

      1. (i)

         not a lifetime mortgage; and

      2. (ii)

         for residential purposes, and the customer does not have the lender’s consent to let the property; and

   3. (c)

      the regulated mortgage contract had a discounted or introductory period which has expired (such that the interest rate payable by the customer under that contract is a reversion or standard variable rate).

2. (2)

   A firm with permission for administering a regulated mortgage contract must have, and operate in accordance with, a strategy for:

   1. (a)

      determining whether each of the customers in relation to whom the firm is carrying on that activity for an unregulated owner is a notifiable customer; and

   2. (b)

      giving the notice required by this rule at least once to each such notifiable customer.

3. (3)

   For the purposes of (2), an unregulated owner is a person who does not have permission for entering into a regulated mortgage contract and:

   1. (a)

      who entered into the regulated mortgage contract as lender; or

   2. (b)

      to whom the rights of the lender under regulated mortgage contract have passed by legal or equitable assignment, or by operation of law.

4. (4)

   A firm which has permission for entering into a regulated mortgage contract but is no longer carrying on that activity in relation to a particular portfolio or book of regulated mortgage contracts must have, and operate in accordance with, a strategy for:

   1. (a)

      determining whether each of the customers in that portfolio or book is a notifiable customer; and

   2. (b)

      giving the notice required by this rule at least once to each such notifiable customer.

5. (5)

   The notice must:

   1. (a)

      include a statement to the effect that it has recently become simpler for a customer to enter into a more affordable mortgage with another lender if the customer is not looking to borrow any more than they currently owe under their mortgage and has kept up to date with their mortgage payments over the last 12 months; and

   2. (b)

      refer the customer to sources of information about how to switch their mortgage to a lender who applies the rules in this section.

6. (6)

   A notice under this rule must be in a durable medium.

7. (7)

   A firm is not required to give a notice under this rule to a customer in relation to a regulated mortgage contract if another person has given such a notice to the customer in relation to that contract.

1. (1)

   1The governing body of the firm must adopt or approve the strategy required by MCOB 11.9.14R no later than 1 May 2020.

2. (2)

   The firm must make the determination and give the notice required by MCOB 11.9.14R no later than 15 January 20213.

   2