October 5th, 2015
As part of the EU Mortgage Credit Directive, due to take affect from March 2016, buy to let property owners will be subject to considerable affordability checks that could see many borrowers refused lending for such a purpose.
Currently in the UK, it is estimated that 1.6 million borrowers fall into the bracket of “accidental landlords”, a term that the EU has taken particular notice of as an area of potential risk. As such, rule changes are due to be implemented that will see the buy to let market pushed into being regulated by the Financial Conduct Authority, ushering in the level of financial checks that a residential home owner is usually subject to for a mortgage.
The term “accidental landlord” refers to a situation where-by the property owner has been forced to retain a property when moving home, or inherited the home and then maintained this under a rental agreement. The Treasury’s view of this situation has changed, with a recently published document confirming the view that borrowers are in this position, “as a result of circumstance rather than through their own active business decision”
It further confirms that, “The Government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.”
Concerns within the market are that this initiative will further stunt the growth of the UK housing market. A recent survey by property data specialist, Hometrack, suggested that there had been no growth in the average property value in September, the first time this has been noted since January 2014. As of last year, 151,000 buy to let mortgages were approved by mortgage lenders.
While at present buy to let mortgage lending tends to fall outside of the standard affordability checks that lenders traditionally complete for residential lending, the change in rules will mean that a lender will have to look further than simply confirming that the rental income covers the mortgage payments, to comply with the notion that they are effectively protecting consumer rights.
Steve Clements, of Contractor Mortgages Made Easy, suggested that signs of the incoming changes are already apparent in the market. He said: “Since the turn of the year, lenders assessing a buy to let mortgage application have begun asking questions that would not normally be associated with a buy to let mortgage process. Now, it is not unusual to see a lender considering the day to day spending habits on an applicant’s bank statements, or questioning the viability of retaining a substantial residential mortgage as a buy to let, while also buying another property on a residential mortgage basis.
“What is questionable is the Governments suggestion that a buy to let borrower maintaining an encumbered residential property when moving is a forced matter. Many homeowners view this process as a sound business investment, to put together a pension plan for their futures. There is an argument to suggest that this will not affect the affordability of a large section of current buy to let landlords, so the actual motive could potentially be the creation of a higher level of available property for a market lacking quality stock.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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