As part of its implementation of the EU’s Mortgage Credit Directive (MCD), the UK Government has announced its intention to bring more of the buy-to-let market under the scope of FCA regulation.
In a recent consultation paper, HM Treasury stated that, in order to comply with the new European legislation, certain buy-to-let contracts where the consumer has not made “an active decision” to become a landlord would need to be regulated.
Generally speaking, this refers to cases where the decision to let out a property is a personal rather than a business one; for instance, if a rental property has been inherited, or if the borrower is letting out a property in which they previously lived and are currently unable to sell.
The government expects that the changes will take effect by March 2016.
What does this mean for you?
The government expects that the underwriting process will determine whether or not a buy-to-let borrower is making a business decision when they finance a rental property. If the decision is “wholly or predominantly” for the purposes of a letting business, your mortgage will be unaffected.
According to the consultation, the draft legislation will allow lenders to rely on customer declaration unless they have “reasonable cause” to think that the customer is providing incorrect information. It is vital to give full and correct information to your lender, as you may be guilty of mortgage fraud if you do not.
When the legislation comes into effect in March 2016, it will only affect new borrowers; existing ‘accidental’ and let-to-buy landlords will be unaffected.
When selling a regulated mortgage, the lender must be able to show that they conducted a full analysis of their customer’s circumstances and needs and provided a product that was the best possible match. New mortgage rules introduced in April also increased affordability checks and stress-testing for regulated mortgages 1, potentially making it more difficult for applications to be accepted. Buy-to-let loans are usually assessed on the strength of the potential rental income of the property.
See our article, What is a regulated mortgage?, for more information on how FCA regulation might affect your mortgage.
Mixed-use properties and the 40% threshold
Another crucial change, also outlined in the consultation paper, will be to how mixed-use properties are treated.
At present, UK legislation requires that a buy-to-let mortgage be regulated only if 40% or more of the property will be used by the borrower or a close relative as their main or only residence. Under the terms of the MCD, in such a contract, the borrower would always be treated as a consumer; therefore, even if less than 40% of a property were to be used for residential purposes, the loan would need to be regulated.
The consultation will be open until 31 October 2014. To see the consultation in full, including the draft legislation and an impact assessment, visit the gov.uk website.