Mortgage lenders and brokers are in turmoil trying to decipher the meaning of technical terms in European legislation governing buy to let borrowing.
The new rules come into force from April 2016, but many buy to let industry finance professionals are baffled by some of the wording.
The legislation is designed to make banks carry out affordability tests on customers taking out home loans but exempts professional landlords.
However, no one seems quite sure if accidental landlords are consumers or professionals and this makes a big difference to the way lenders underwrite their mortgage applications.
The Treasury says buy to let borrowers who are landlords “as a result of circumstance rather than through their own active business decision” should be treated in the same way as other mortgage customers.
That means landlords who have let a former home to move on probably do not qualify as professional landlords.
If this is the case, bank and building society underwriters have to apply stringent affordability tests to make sure they can afford the buy to let mortgage from their disposable income, while professional landlords have buy to let deals assessed on the rent generated by the property.
Buy to let mortgage lender trade body, The Council of Mortgage Lenders (CML) has urged the Treasury and regulator the Financial Conduct Authority to move to clarify the confusion.
“The situation could be banks and building societies will just stop lending to these customers until the matter is sorted out,” said a CML spokesman.
“If they do lend but break the rules, that means they fall foul of the regulators. At the moment no one is sure what the definition of a professional landlord actually is.”
The Treasury has not yet responded to the CML plea, but has indicated the reason for including accidental landlords under the new rules is aimed at stopping borrowers who fail consumer affordability tests trying to work around the rules by applying for a buy to let loan and then living in the property.
The mortgage industry terms this fraud as ‘gaming’.©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.