How new mortgage rules will affect ‘accidental’ landlords
In new legislation published on 26 January, HM Treasury clarified how it will implement new European mortgage rules, including outlining which buy-to-let mortgages will be exempt from the new regulation.
The legislation follows a period of consultation which ran from September to December last year.
The EU’s Mortgage Credit Directive (MCD) allows member states to exclude buy-to-let borrowing from the new regime, but requires that an ‘appropriate alternative framework’ is implemented in its place 1. The Treasury announced last September that this would bring more of the buy-to-let market under Financial Conduct Authority (FCA) regulation, but did not confirm how much of the market would be affected.
Key to landlords is the distinction made in the new legislation between mortgage loans for business purposes and mortgage loans to consumers. The former will not be regulated; the latter now will. The Mortgage Credit Directive Order 2015 makes the distinction as follows:
‘“…consumer buy-to-let mortgage contract” means a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower…’
What does this mean for buy-to-let consumers?
The UK government believes that the existing FCA regime affords UK consumers most of the benefits and protections that the MCD requires. The government will therefore simply need to expand the remit of the FCA to cover a greater range of mortgage business. This means that some parts of the buy-to-let market that are not currently under FCA regulation will need to be regulated.
This will likely include:
- Properties which the borrower has previously lived in but is unable to sell, so must let it out in order to live elsewhere (known as ‘let-to-let’ or ‘let-to-buy’)
- Properties which, at the time of purchase, the borrower intends to occupy at a future date
- Properties which the borrower intends to let to a close relative
- Properties which the borrower has inherited and is unable to sell, so has decided to let it out
Source: The Mortgage Credit Directive Order 2015, s 4 (4)
Some of these scenarios, such as so-called ‘family buy-to-lets’ or cases where the borrower intended to occupy the property in the future, already fell under the FCA’s remit 2. Regulation afforded borrowers greater statutory protection, ensured that certain rules were followed by the person or company providing mortgage advice, and made it more difficult for lenders to repossess their home if they fell into arrears.
So far, so good – from a consumer perspective, regulation appears to have few downsides.
With the implementation in early 2014 of the Mortgage Market Review, however, this changed. Strict new affordability and stress-testing made regulated buy-to-let lending much more difficult, and several lenders pulled out of the market, saying that the small number of such niche customers did not justify the resources required 3.
It is feasible that other buy-to-let ‘consumers’, such as accidental landlords, will find themselves similarly underrepresented when the MCD comes into effect in 2016. In its final stage impact assessment, released last December, the government claimed that roughly 11% of the buy-to-let market would be affected – approximately 18,000 mortgages per year 4.
By this time, however, mortgage lenders will have had ample time to come to grips with the new rules, which the government has announced this far ahead of time in order to give consumers and firms time to prepare. While there may not be many finance options at present for a regulated buy-to-let customer, this may change by the time the new rules come into effect.
To read more about how the EU Mortgage Credit Directive will be implemented in the UK, visit the GOV.UK website.
- “Consultation outcome: Implementation of the EU Mortgage Credit Directive”. HM Treasury. Retrieved on 27 Jan 2015.
- Financial Conduct Authority Handbook, PERG 4.4.8
- Blackmore, N. “New mortgage rules pushing up rates?” The Telegraph. 26 Apr 2014.
- “The Implementation of the EU Mortgage Credit Directive – Impact Assessment”. HM Treasury. Retrieved on 27 Jan 2016.