Property owners could find it much harder to become accidental landlords within the next two years as a result of forthcoming European legislation.
Many of Britain's small army of landlords ended up letting out a property originally purchased with a mainstream mortgage - often when they decided to hold onto it as an investment after a change of circumstances, such as moving in with a partner, relocation or failure to sell. However, the Treasury has said a new European Mortgage Credit Directive, which comes into force in 2016, will result in some landlord mortgages facing regulation - and this would stop homeowners making an easy move to being a landlord.
At present, buy-to-let mortgages are non-regulated, unlike mainstream owner-occupier mortgages.This is because landlords are usually viewed as business borrowers and thus require less supervision. Those with a regular mortgage are viewed as consumers and so need tougher rules, and the regulations lenders must abide by were tightened up this April by the Financial Conduct Authority.
It means currently older people can obtain landlord loans, as opposed to stricter age limits on mainstream mortgages - and it means lenders do not have to apply stricter affordability criteria and take almost all new borrowers through a mortgage advice process. But from 2016, banks may have to start refusing to lend to homeowners not intending to treat their buy-to-let portfolio as a business. This could hit those hoping to simply hold onto their existing mortgage and pay a small premium to let their property, or complete an easy switch to a buy-to-let rate.
Banks will usually allow homeowners to simply switch over to a landlord loan when there is a change of circumstances, or pay charges to be allowed to keep their residential mortgage and let the property. For instance, one This is Money reader last month asked if she could change her Nationwide Building Society terms after deciding to let out her property. The answer was yes, but only if she paid more interest on the mortgage to convert it.
In the future, the answer will probably be no under the stricter rules. This is because under certain circumstances, some landlord lending will be viewed as consumer lending and will therefore require regulation. In the Treasury document, it said: ‘For the majority of buy-to-let transactions, the borrower is making an active decision to become a landlord, an activity for which they will receive an income and for which they will be taxed as a business.
‘There are some situations where borrowers do not seem to be acting in a business capacity. The Government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.’ It goes on to add that instances where regulation is needed will be a ‘small proportion’ of total buy-to-let transactions.
The Treasury document shows in 2013, 151,000 buy-to-let mortgages were taken out for house purchase or remortaging, making up 12 per cent of total lending. There is no breakdown in the figures to show many were for those with just one buy-to-let property.
The numbers are significantly higher than the trough in buy-to-let lending that the UK experienced after the financial crisis, where some lenders closed their doors to new business.However, it is still below the peak of buy-to-let lending in 2007 where 339,000 mortgages were taken out for buy-to-let purposes.'Move will add a layer of cost and confusion for all involved'
The news has been met with a wave of criticism by experts who say there is no need to regulate any part of the buy-to-let industry. The Council of Mortgage Lenders say lenders might struggle to distinguish between ‘consumer’ landlords and buy-to-let professionals.
Paul Smee, CML director general, said: ‘It is frustrating 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.’
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: 'A buy-to-let is an investment, whether the property was inherited, a let-to-buy or purchased independently, and should be treated as such. 'Regulating some buy-to-let loans but not others will add another layer of cost and confusion for lenders, brokers and borrowers alike.
'Buy-to-let lenders already require that borrowers meet certain criteria including have an income and have tough regimes in place to prevent gaming - trying to get around the new affordability rules introduced in the mortgage market review. ‘Formally regulating buy-to-let is unnecessary and is not being done to provide additional protection to consumers.'