Property investors moving into buy to let homes to mitigate capital gains tax bills may find they are targeted as fraudsters by mortgage lenders.
A new crackdown on mortgage rules aimed at stopping home buyers taking out buy to let loans could catch out property investors trying to avoid tax as well.
The Financial Conduct Authority (FCA) has ordered lenders to carry out extra checks to make sure borrowers do not dodge affordability tests by taking out a buy to let loan and then living in the rental property.
The regulator wants to stop borrowers who do not earn enough to qualify for a home loan to cheat the system by pretending to be buy to let landlords.
“Buy-to-let mortgages are excluded as they are not regulated mortgages,” said an FCA spokesman.
“We are conscious, however, that some borrowers who are constrained by the affordability cap might be encouraged to make fraudulent applications for buy-to-let mortgages.”
One test lenders will make is checking the electoral roll to see who is resident at the address at random times six months after the start of a buy to let mortgage.
Mortgage cheats will then be in breach of the loan contract which generally states the borrower cannot live in the property without notifying the lender.
If the contract is breached, the borrower will have three months to pay back the loan.
Many buy to let landlords could be caught under the crackdown if they move into their rental property in a bid to reduce the capital gains tax liability on selling the home by claiming principle residence relief.
However, moving in could be considered a breach of the loan, and in extreme circumstances, mortgage fraud.
“There is a much higher chance it will be picked up now,” said Ray Boulger of mortgage broker Jon Charcol. “The lender would require the mortgage to be repaid and you would have to sell the property if you could not get a mortgage. It could put you in a position where you have to sell when it is not a good time to. The risks of doing it could be substantial.”