Homeowners who become “accidental landlords” – because they need to relocate for work or because they can’t sell their property, for example – could find it harder to get a mortgage, thanks to European legislation.
The Treasury today indicated that if lenders are going to abide by the new European Mortgage Credit Directive, a necessity by 2016, certain types of landlord mortgage will face tougher regulation.
This could mean that banks simply refuse mortgages in these circumstances.
Currently, buy-to-let mortgages fall outside the regulation which applies to mainstream, owner-occupier mortgages. This is why older people can obtain landlord loans, for instance, and why the latter are also available on an interest-only basis even where there is no plan in place for the repayment of the capital borrowed.
The distinction has arisen because landlords are generally viewed as “business” borrowers, requiring less supervision. Owner-occupiers are viewed as “consumers” requiring more protection through tougher regulation. “Riskier” forms of lending have been all but banned under rules applying to owner-occupier mortgages.
Under current rules if a homeowner decides to let their property for whatever reason – perhaps because they cannot sell it, or want to wait to sell it at a later date – the normal process is to switch over to a landlord loan, which most existing lenders will permit. This is often referred to as “let-to-buy”.
In future this looks unlikely to be allowed by many lenders. In a document published today, the Treasury has said there will be circumstances in which certain landlord lending will be viewed as “consumer” lending and should there fore be regulated more tightly.
The Treasury said: “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.”
Banks and building societies, as well as mortgage brokers, have responded angrily to the idea of even more regulation where “there is no obvious consumer need”.
The Council of Mortgage Lenders, representing the mortgage industry, said the regulation the Treasury now 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.”
A spokeswoman added that lenders might in many cases truggle to distinguish between “consumer” landlords and those who went into buy-to-let deliberately. “Faced with the increased costs and difficulties they might simply decide not to lend in these circumstances,” she said.
Mortgage broker Mark Harris of 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.