A paper issued today (5 August) by the Financial Conduct Authority has highlighted the potential for increasing instances of fraudulent buy-to-let applications, and warned BTL lenders to have “robust” verification procedures in place.
The 15-page paper constitutes the FCA’s official guidance to firms following an announcement in June from the Bank of England’s Financial Policy Committee, who recommended that only 15% of new loans issued by a lender should exceed 4.5 times the borrower’s income 1.
Though buy-to-let mortgages, being mostly unregulated by the FCA, are excluded from the recommendation, the market still felt ripples when a major buy-to-let lender imposed a 4.99 LTI (loan to income) cap across the entirety of its BTL range 2. Coming shortly after the FPC’s recommendation, this move caused fears that regulation in the residential space would ‘spill over’ into the unregulated market; however, no other mainstream lender followed suit.
Buy to let: to regulate, or not to regulate?
The regulation of the buy-to-let market has been a topic of debate in the UK for some time. Some feel that the ability of BTL applicants to borrow larger amounts, unfettered by the stringent affordability requirements of residential products, distorts the housing market and prevents owner-occupiers from competing for properties. Others feel that buy-to-let landlords are running a business, and should be able to expose themselves to greater financial risk in order to cater to the UK’s growing private tenant market. (Notably, the Council of Mortgage Lenders has stated that the risks of market failure stem more from the borrower’s investment decision than the product they used to finance it 3.)
At present, a buy-to-let sale is only regulated by the FCA when a borrower or close family member of the borrower will be occupying 40% or more of the property as their main or only home. It is perhaps telling that, following the implementation in April of the Mortgage Market Review (which imposed tighter affordability assessments for regulated mortgages), many lenders ceased to offer this type of loan 4.
Earlier this week, the UK’s largest residential mortgage lender announced that it would be reducing the cap on its Help to Buy equity loan mortgages from £500,000 to just £150,000, which will particularly impact borrowers in London and the South East.
As underwriting standards in the residential marketplace become ever tougher, commentators warn that the fraudulent use of buy-to-let mortgages by desperate borrowers who cannot meet their lender’s affordability requirements will rise.
As the FCA notes in its paper, the penalties for mortgage fraud are severe, and there is little evidence that this has been or will be a serious point of concern. Nevertheless, they “expect firms to ensure that application verification procedures … are robust”.
What does this mean for me?
It is likely that, as a result of this guidance, many lenders who aren’t already implementing full ‘fact-finds’ for their BTL applicants will begin to do so.
As a broker, we will be responsible for undertaking this on behalf of the lender, which means we will collect from you documents that prove your identity, income, address and so on. Because we already take steps to ensure that we gather full and accurate information, there will be no material change to the application process with us.