So-called “accidental” landlords could be refused mortgages come 2016 due to a European directive.
It means that homeowners who “let to buy”, couples renting out a spare property, people relocating for work, or those struggling to sell their property could be refused a mortgage.
However, “professional” or portfolio landlords won’t be affected by the new rules.
It’s all about Europe
The rule change comes from the new European Mortgage Credit Directive. It differentiates between landlords who are “business” borrowers and landlords who are viewed as “consumers”.
In short, business borrowers require less protection than consumer borrowers, so the latter will be subject to tougher rules when they take out a buy-to-let mortgage.
The Treasury has confirmed how it will interpret the EU directive – and it will mean a clampdown on borrowing. The Government previously said that buy-to-let loans wouldn’t be regulated in any way so experts have declared the Treasury announcement as a U-turn.
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Which buy-to-let loans will be regulated?
According to the Council of Mortgage Lenders (CML) the rule change affects “those cases where borrowers are not making an active decision to acquire a property to become a landlord, and where they do not seem to be acting in a business capacity.”
Examples might include cases where the property has been inherited, or was previously lived in by the borrower, but the borrower is unable to sell it and so lets it instead. Homeowners who rent out their property while they live abroad or move in with a partner will also be affected.
Borrowers that escape the new rules will be those that buy a property with the sole purpose of renting it out.
What does “regulated” mean anyway?
Owner-occupiers need to pass tough affordability checks to buy a house. Lenders have been clamping down since the financial crisis in 2008, but the rules got even more stringent when the Mortgage Market Review was introduced in April 2014.
Landlords, on the other hand, generally find it easier to get mortgages. There’s less focus on their income and spending patterns as it’s generally accepted that the rent, not the borrower’s salary, pays the mortgage. Older borrowers, where the loan runs into retirement age, will find it easier to get a buy-to-let mortgage than a residential mortgage.
Buy-to-let mortgages are more likely to be taken out on an interest-only basis even where there is no plan in place for the repayment of the capital borrowed. In contrast, interest-only home loans have pretty much disappeared from the owner-occupier market.
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Is the change good news or bad news?
Most experts say increased regulation of buy-to-let mortgages is bad news. The CML, which represents mortgage lenders, described it as “frustrating” and “disappointing”. It says there’s no need for increased consumer protection in this part of the mortgage market and the move is purely about meeting European legal requirements.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says regulating some buy-to-let loans but not others “will add another layer of cost and confusion for lenders, brokers and borrowers alike”.
The Buildings Societies Association said the directive will “add cost and complexity to the mortgage process, with no discernible consumer benefit”.
So, in short, the experts are saying that as well as being harder to get, buy-to-let loans will become more expensive too.
The proposed new regulation will only apply to relevant new loans (not existing loans), and not until March 2016. However, it means that existing accidental landlords may run into problems when they come to remortgage after this date – if they can’t get a new mortgage they may be either stuck on a high standard variable rate (SVR) or forced to sell up.
What will happen next?
In addition to the Treasury's consultation on the legislation to implement the European Mortgage Credit Directive in the UK, there will also soon be another consultation from the Financial Conduct Authority (FCA) on the practical application of the framework to deliver the new requirements.
The Treasury consultation closes on 30th October. The Government aims to have finalised legislation by March 2015 and the new changes will formally take effect in March 2016.
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