Mortgage changes afoot for ‘accidental’ property investors
The Mortgage Credit Directive, part of new EU regulations, is designed to more stringently regulate the buy-to-let property market. The directive applies to those using mortgages to finance investment properties and applies from March 21st 2016.
The ‘accidental’ landlord and professional buy-to-let investor
Broadly speaking there tends to be two types of landlord:
- ‘Accidental’ or ‘consumer buy-to-let landlord’ – someone who perhaps inherits a property and lets it out because they don’t need to live in it themselves or lets out their home – perhaps because they move abroad. They’ve never intended to become a landlord but circumstances contrive to make them become one.
- Professional property buy-to-let investor – someone (or perhaps a business entity) who buys one or more properties with the sole purpose of letting them and deriving income from the rents paid by tenants. Maybe, in the fullness of time, they’ll sell one or more of the properties in their portfolio to make a profit from likely property value increases.
The situation up to the implementation of the Mortgage Credit Directive
‘Accidental’ landlords weren’t previously subject to the same type of stringent mortgage qualification checks that apply to regular residential mortgage applicants. The directive will change this and ensure accidental landlords have to pass the type of affordability tests in terms of their income and expenditure applicable to residential borrowers.
In effect, the buy-to-let market is becoming supervised for the first time and those considered to be ‘accidental’ or ‘consumer buy-to-let’ landlords will have to take out a regulated mortgage product.
Before the directive, buy-to-let mortgages were unregulated basically because buy-to-let investors were all considered as a business, and therefore required less supervision than someone taking out a mortgage to buy and live in their home.
The Treasury has defined consumer buy-to-let as: “a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.”
The reason for these measures
Accidental landlords don’t usually make a conscious business decision regarding their buy-to-let property, the directive is designed to treat them as consumers rather than professional property investors.
Before the Mortgage Credit Directive, mortgages for ‘accidental’ landlords as with professional property investors were calculated more in relation to the likely income from rentals rather than a more direct assessment of the applicant’s ability to pay it.
According to the Council of Mortgage Lenders (CML) there were over 1.6 million mortgage products ‘running’ at the end of 2014, and the Treasury estimate some 11% fall into the consumer buy-to-let category.
In effect, the new legislation allows the borrower to declare whether they are a ‘professional’ property investor or a consumer. Lenders will likely have to decide on individual cases whether an applicant is a consumer or a professional.
Foreign currency mortgages
There are new requirements for lenders providing mortgages in a foreign country. They’ll have to check the exchange rate between the currency the borrower receives their income in and the one they pay the mortgage with. If currencies fluctuate beyond a certain limit, the lender would be obliged to let the borrower switch currency if they wish.
This could prove costly for lenders and there are fears they may stop offering foreign currency mortgages.
For the professional property investor, the Mortgage Credit Directive doesn’t affect the way they apply for and obtain funding for property purchases. It’s squarely aimed at ‘consumer buy-to-let’ landlords.
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