Buy-to-let borrowers face new costs and limits
'Accidental landlords' face new rules on borrowing, under new European laws.
Buy-to-let home owners will have to pass tough new affordability tests that could result in tens of thousands of people being denied loans, and others paying more for mortgages.
New rules are being created after Europe insisted on changes to how “accidental landlords” are lent money. Up to a fifth of the 1.6 million existing buy-to-let mortgages are thought to be of this type.
The changes, which have to be implemented by March 2016, are likely to weaken the housing market, which has slowed because of changes to routine mortgages.
For the first time in 19 months, British property values showed zero growth in September, according to a survey by Hometrack, a property data specialist.
People who have inherited property, or rent out a house after being unable to sell, will be affected by the changes. Affordability rules for typical mortgages require lenders to assess borrowers’ incomes and spending habits in great detail to ensure they can afford a loan, both now and when interest rates rise.
According to a document published by the Treasury as part of a consultation, in “accidental” 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,” states the document, ushering in changes to the buy-to-let market.
Last year, 151,000 buy-to-let mortgages were taken out. At the moment, such mortgages fall outside regulation that applies to mainstream, owner-occupier mortgages. The new rules would mean that certain buy-to-let mortgages may fall under the affordability rules to ensure applicants are protected as consumers instead of being assessed as business owners.
Most buy-to-let mortgages are calculated in relation to the amount of rental income made from the property. If affordability is assessed, it could mean that older home owners were no longer able to take out buy-to-let mortgages. This is because mortgage companies often insist that holders plan to repay the whole amount before they retire.
It was originally believed that the EU laws would not affect the British mortgage market, but the new plans are part of the Mortgage Credit Directive, which will also clamp down on other loans where home owners put up their property as security.
At present, “second charge” mortgages, which are taken out on top of their existing mortgage, come under consumer credit rules, which apply to types of finance such as credit cards and personal loans.
The Financial Conduct Authority (FCA) is proposing that instead, the second charge loan sector should be brought under its mortgage regime. This would also require lenders to comply with strict rules around affordable lending and dealing with payment difficulties.
Rosanna Bryant, a partner in retail financial services at Addleshaw Goddard, said there was confusion about how the Government would define “not for business” mortgages.
“Essentially, it will be looking at buy-to-let that isn’t done for business purposes; 'reluctant landlords’,” she said.
“That may be people who are unable to sell a property and rent it out, or who can’t live in a property because they have moved away for work, or who have inherited property. The line that is drawn isn’t that obvious.”
A spokesman for the Treasury said the Government did not know how many people would be affected by the rule changes. A spokesman for the Council of Mortgage Lenders (CML) said it would be fewer than 20 per cent of the UK’s 1.6 million buy-to-let mortgage holders, but it did not have precise data.
David Cox, the managing director at the Association of Residential Letting Agents, said there was little clarity about the number of accidental landlords, but that the number had reduced since its peak before the property crash in 2007.
“Obtaining exact figures for accidental landlords is difficult, because it’s an underground number – some landlords acquired residential mortgages and now rent out their properties, whilst others explicitly took out BTL [buy-to-let] mortgages,” he said.
Fiona Hoyle, the head of consumer finance at the Finance and Leasing Association, said she was concerned by how fast the new rules would have to be implemented.
“Firms will only have nine months to get to grips with it, and that’s not really how mortgage lending works – there is a pipeline,” she said.
Mark Harris, the chief executive of the mortgage broker, SPF Private Clients, said that the new system would bring extra costs.
“The decision to regulate some buy-to-let loans but not others makes little sense and is bound to confuse borrowers,” he said. “Buy-to-let is an investment, whether the property was inherited, a let-to-buy or purchased independently, and should be treated as such.
“Regulation costs money and lenders are bound to pass these extra costs on to borrowers in the form of higher mortgage rates and heftier fees.”
David Hollingworth, a spokesman for London and Country Mortgages, said that the mortgage industry had initially been pleased to avoid the whole of the buy-to -let market being moved into the stricter regulation regime, but were unclear about the “for business” aspect of the new rules.
“Accidental landlords are the type of borrower that wants to move but face difficulty in selling their property and so keeps it to let,” he said.
“After the credit crunch this became more prevalent given the slow housing market, resulting in those affected being dubbed 'accidental landlords’. Of course, you could argue that is a very considered business decision in investing for the long term, so that will certainly be one that the market is looking for clarification on.”
There have been concerns that buy-to-let investors can price owner-occupiers out of the market, as the London property market is seen as a stable and profitable long-term investment. Fears were raised when property developers began marketing blocks of flats to overseas investors, with critics saying that the buy-to-let market should be limited.
