On 21 March, the Mortgage Credit Directive (MCD) became applicable across the European Union. The directive, which was adopted on 4 February 2014, is intended to ensure that anyone buying a property or taking out a loan secured against their home is adequately informed about and protected against the risks. So what will the directive cover and what benefits will it bring to EU consumers?

An important industry

Mortgages represent not only the most significant financial investment decision most people make in their lifetime, but mortgage lending also plays a pivotal role in the growth prospects of the European economy as a whole. According to European Central Bank figures, mortgages represent about 75% of outstanding bank loans in the euro area and in January 2016 amounted to € 3.95 trillion.

However the financial crisis, and a number of property booms and busts, has resulted in a lot of Europeans losing confidence in mortgage markets. The impact of irresponsible lending is now being felt, and many borrowers have found their loans increasingly unaffordable, resulting in a rise in defaults and foreclosures.

So the overall objective of the directive, which applies to both secured credit and home loans, is to create a competitive, EU-wide mortgage credit market with a high level of consumer protection. Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union, calls it an '' important step in improving consumer information and encouraging responsible lending.''

Scope and potential benefits

The directive covers all loans made to consumers for the purpose of buying a home, as well as ones that are guaranteed by a mortgage or another comparable security.

One of the major benefits the directive will bring consumers is greater transparency and more responsible lending practices. Lenders will have to provide consumers with a European Standardised Information Sheet, or ESIS, which will clearly explain the borrowing rate and how it is calculated, as well as the possible risks linked to variable rate loans.

The directive also improves the safeguards needed before a credit agreement can be reached. Creditors will have to conduct a thorough, documented creditworthiness assessment before granting credit, and then only if the assessment indicates that the consumer is likely to meet the credit obligations. Borrowers will also get more time before they are bound by a credit agreement, through a 'reflection period', a right of withdrawal, or both.

The directive will also bring the possibility for consumers to repay their mortgages early, before the end of the contact. This will allow borrowers more flexibility, for example to consolidate debts through a new mortgage or sell their property because of a change in personal and/or financial circumstances.

Read more on the Mortgage Credit Directive