Part of the buy-to-let mortgage market is to be regulated after all. Taken from the RLA member magazine, the Residential Property Investor (RPI) comes important news for anyone with, or considering a buy-to-let mortgage. Read on!
In September, the Government decided to regulate part of the buy-to-let mortgage market after all – those loans taken out by ‘accidental landlords’.
This is in compliance with an EU mortgage credit directive due to be implemented in March 2016. At first the EU said that under this directive, all buy-to-let mortgages would have to be regulated.
This propelled the UK authorities on a mission to win an exemption for the British buy-to-let market – a mission it thought it had won in its entirety.
However, the Treasury now believes that it would be unlawful to exempt all buy-to-let lending from the UK’s statutory regulatory framework. In this partial U-turn, the Treasury has said that ‘accidental landlords’ did not make a conscious decision to buy a property to rent out and were therefore consumers and not acting in a business capacity.
It is these ‘accidental landlords’ whose buy-to-let mortgages will be regulated, and who will be subject to the same tough (and possibly much tougher) lending criteria as ordinary home buyers now face.
This includes detailed assessment of affordability, with questions asked about household spending habits, and how the borrower would cope in certain circumstances – for example, in the event of redundancy or a rate rise.
Importantly, ‘accidental landlords’ would be assessed on the basis of their earnings, not rental income.
There was an outcry from landlords and the mortgage industry when it first seemed that all buy-to-let mortgages would be regulated.
While regulation gives borrowers some protection, the concern was that under the EU directive, lenders would have been forced to measure borrowing ability on a landlord’s earned income and not from rental revenue.
While this battle was largely won, the Treasury’s eight-week consultation which closed in late October makes it clear that there will be at least some impact on buy-tolet borrowers.
So, who will be affected? Essentially, it is amateurs: those who have not actively acquired a property in order to be a landlord and who do not appear to be acting in a business capacity. They could include people who have inherited a property and decide to let it out; or lived in a home they have been unable to sell, and which they now let out.
While this may be a relatively small group of buy-to-let borrowers, there are some unresolved issues.
First, lenders will have to discriminate between buy-to-let borrowers, meaning that all mortgage applicants will either have to answer questions about their status as landlords or, as ‘professional’ landlords, will have to supply a declaration.
If they do, then lenders must have no grounds for suspecting this statement to be incorrect. Either way, buy-to-let applicants can expect some grilling.
Did they make an active decision to become a landlord? Are these properties run as businesses? Do they accept that their borrowing is a commercial decision?
This leads us on to the second point: it is not clear how lenders will deal with individual cases which might be described as borderline. Could landlords not set up as businesses and have just one or two rental properties be caught?
Nor is it clear how many landlords could be affected. In its consultation, the Government asked for views.
Since the MMR (Mortgage Market Review) was implemented at the end of April, affecting residential but not buy-to-let borrowers, there have been plenty of headlines.
Some mortgage applicants have had to face three hours of questioning about their spending habits. Buy-to-let applicants judged to be ‘accidental landlords’ would have to brace themselves for the same – and more.
Additional questions could be about the possible impact of rental voids, and what the borrower would do if there are rental arrears, or an anti-social tenant.
What benefits will there be to buy-to-let borrowers whose mortgages will become regulated? Well, they will be able to complain to the financial ombudsman if they feel they have been mis-sold a particular mortgage product, and may be able to win compensation. Brokers and lenders who have mis-sold products to ‘accidental landlords’ could also face disciplinary action.
However, the Treasury has put forward its proposals purely to comply with European legal requirements, and not because it sees any need for further consumer protection.
Paul Smee, director general of the Council of Mortgage Lenders, says: “It is frustrating that, despite earlier assurances, the buy-to-let position turns out not to have been adequately resolved, resulting in a new proposal for regulating part of the buy-to-let mortgage market.”
Paul Broadhead, of the Building Societies Association, says: “It is clear that this directive will add cost and complexity to the mortgage process, with no discernible consumer benefit.”
The Government aims to finalise legislation by March 2015, with changes to be implemented in March 2016. What does seem likely is that there will be a new breed of mortgage products aimed at those buy-to-let ‘accidentals and amateurs’ whose loans will be regulated from March 2016.