So called “accidental landlords”, those who let their home out when they can’t sell (let-to-buy) or when the want to move away (let-to-move), could be seriously affected by new EU legislation due to take effect from March 2016.
The European Mortgage Credit Directive (MDC) means that some types of landlord (buy-to-let) mortgages may face stricter criteria. This could mean that lender would simply refuse to convert or lend when a home owner changes from a consumer mortgage to a landlord one.
As the rules stand householders (or consumers) with mortgages enjoy greater protection through stricter regulation than do landlords whose mortgages are classed as non-consumer or business.
According to HM Treasury:
“When mortgage regulation was introduced in 2004 the government drew a distinction between mortgage lending to owner-occupiers and to buy-to-let landlords, and decided not to bring buy-to-let mortgage lending within the scope of FCA regulation. This reflects the different characteristics of buy-to-let customers, most of whom are carrying out a business activity and so do not require the same protections, as well as the fact that the borrower’s own home is not at risk.”
Normally, when a home owner decides to let out their property it would be required, under the terms of their mortgage contract, that they apply to their lender to convert their loan to a landlord (or buy-to-let equivalent) loan. Under the new ruling it looks as though most lenders will refuse this option.
This is because, according to the Treasury’s view, these loans could be viewed as consumer contracts, which require much tighter regulation than landlord mortgages.
The UK Treasury says:
“There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a buy-to-let arrangement. In these cases, the borrower is a landlord as a result of circumstance rather than through their own active business decision.
“The government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework. We would expect such instances...
to represent a small proportion of total buy-to-let transactions, but would value views from respondents as to how many transactions may be subject to the appropriate framework.”
However, the Council of Mortgage Lenders (CML), has said that they are not happy with the proposals as they stand and the CML “looks forward to working with the Treasury and with the Financial Conduct Authority to minimise disruption, especially given that UK mortgage regulation has only recently been completely overhauled.”
Paul Smee, CML director general, comments:
“With the mortgage market review out of the way, we now enter round two of regulatory change as a result of the European Mortgage Directive. We are hopeful that most of the impact should be modest, as much of it was anticipated and helpfully built in to the new rules in the first place.
“It is frustrating though 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. The regulatory regime now being proposed is based not on any evidence of a need for additional consumer protection, but purely on ensuring that the European legal requirements are met.”
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