For almost twenty years, people hoping to borrow money in order to be able to invest in rental property have been able to do so with the use of a buy-to-let mortgage.
But it is not just professional property investors who do it, nor even keen amateurs and first-timers with their eyes on building up a portfolio; many landlords are actually forced by circumstance into letting out their home. Because of the wide range of borrowers that buy-to-let attracts, certain areas of the market require more consumer safeguards.
Therefore, if you are investing in buy-to-let, it is important to know what to expect – particularly with the approach of new pan-European legislation, known as the Mortgage Credit Directive, that will have pronounced effects on the way the UK mortgage market is run.
Types of buy-to-let borrower
There are currently two types of buy-to-let borrower: unregulated and regulated. The latter group fall under the remit of the Financial Conduct Authority (FCA), which also oversees mortgage sales to owner-occupiers. The vast majority of buy-to-let business is not currently regulated 1.
Under the current rules, a buy-to-let mortgage will need to be regulated if:
– The borrower intends to occupy two fifths or more of the property for their own use;
– The property will be let to a close relative of the borrower – either a spouse or partner, parent, grandparent, sibling, child or grandchild 2
When Part 3 of the Mortgage Credit Directive Order 2015 comes into force on 21 March 2016 3, a third type of buy-to-let borrower will exist, known as buy-to-let ‘consumers’. Consumers are borrowers who are not considered to be letting out a property “wholly or predominantly” for business purposes, such as those who decide or are forced to rent out their home in order to relocate or because they are unable to sell, or those who rent out an inherited property. In the industry, borrowers such as this are often referred to as ‘accidental landlords’.
As such, from 21 March 2016, all new buy-to-let lending will fit into one of the following three types:
- Mortgages that are regulated because the borrower will partly occupy the property or will be letting it to at least one immediate family member
- Mortgages that are regulated because the borrower will be considered a consumer not acting in the course of a business
- Mortgages that are not regulated because the borrower will be considered to be acting in the course of a business
What does it mean if you take out a regulated mortgage?
Mortgage regulation is intended to offer borrowers more protection from misselling, ensure that they receive the most appropriate product for their circumstances, and provide guidelines for how they are treated throughout the mortgage term with regards to issues such as payment arrears and complaints.
It also means that their application will be subject to more stringent suitability checks. The borrower may have to undergo affordability checks that they otherwise would not with an unregulated mortgage and the amount they can borrow may be affected by their income. For this reason, many buy-to-let investors prefer to take out unregulated loans, which can be assessed on the strength of the potential rental income of the property being purchased.
When the Mortgage Credit Directive comes into force next year, some borrowers will essentially be able to ‘opt-out’ of regulation by declaring that they are acting wholly or predominantly in the interests of a business venture. Unless the person granting the mortgage has reasonable cause to suspect that this is not the case, the borrower will not be considered a consumer, and will be able to apply for an unregulated mortgage 4.
What does it mean if you take out an unregulated mortgage?
Borrowers who take out a mortgage for business purposes are generally considered to be more risk-aware than consumers, and as such, the protections and remedies that are afforded to all regulated borrowers are not always extended to unregulated borrowers. This means that, if you take out an unregulated mortgage, you may have fewer options for redress in the event that the product proves to be unsuitable, and your lender may be less lenient with things like payment arrears.
However, a number of buy-to-let lenders currently employ checks that are reminiscent of those carried out by lenders of regulated mortgages. This is particularly the case with first-time or otherwise inexperienced landlords, who may have to prove that they earn a certain amount in addition to the rental income that the property can fetch, in addition to other safeguards.
Furthermore, the Council of Mortgage Lenders has also recently released a ‘statement of practice’ which, as of 7 April, had been adopted by approximately 9 out of 10 buy-to-let lenders 5. This will apply to unregulated buy-to-let lending and outlines best practice regarding the handling of applications and the information given to customers, affordability checks, complaints and financial difficulty, among other things.
So even if you are taking out an unregulated mortgage, your chosen lender should hopefully still aim to provide objective advice and recommend the most appropriate product. For the avoidance of doubt, though, consider only approaching a lender or broker who follows FCA guidelines when recommending buy-to-let mortgages, and be sure to know exactly what entering into a mortgage contract entails and what your responsibilities as a borrower will be.
- “Buy-to-let mortgages – implementing the Mortgage Credit Directive Order 2015”. FCA. Feb 2015.
- The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, art 61(3)(a)
- The Mortgage Credit Directive Order 2015, art 1(5)(c)
- The Mortgage Credit Directive Order 2015, Sch 1 para 4(22)
- “CML members adopt new statement of practice on buy-to-let mortgage lending”. CML. 7 April 2015.
Your home may be repossessed if you do not keep up repayments on a mortgage or another debt secured against it.
The FCA does not regulate most forms of buy-to-let mortgage