The EU Mortgage Credit Directive: An uncertain future for Buy to Let?

The announcement last month of plans to regulate buy-to-let (BTL) lending as part of the EU Mortgage Credit Directive has left many in the mortgage world scratching their heads. All indications were that BTL would remain outside the auspices of the regulator so the Treasury’s comments that new rules will need to apply if lenders are going to abide by the new European legislation have come as quite a shock and represent something of a U-turn.

Currently, BTL mortgages fall outside the regulatory regime which applies to mainstream, owner-occupier mortgages. However, the new plans, set for implementation in 2016, would put a stop to that. In practical terms that would mean that when assessing affordability of certain ‘landlord loans’ stricter rules may apply. BTL borrowers will face many more questions and will need to meet stricter and more stringent criteria regarding their own income rather than assessment against the potential rental yields.

The reality is that if these changes are to be implemented, the shape of the BTL market will certainly shift. The Treasury has said there will be circumstances in which certain landlord lending will be viewed as “consumer” lending and should therefore be regulated more tightly. Consequently, smaller landlords will not necessarily be able to pass the affordability testing in comparison to the current assessment of rental income, so the likelihood is that those with small BTL interests are likely to be penalised when seeking loans. Meanwhile professional investors will probably have the scope to meet the new tougher criteria.

To put things in perspective BTL is hugely important to the UK mortgage market, and it’s growing as a sector. According to the Council of Mortgage Lenders (CML), in 2013 it accounted for 14 per cent of all mortgage borrowing, compared with 11.5 per cent in 2012 and 9.5 per cent in 2011. The new rules would create systems and process problems for lenders, borrowers and brokers alike, with the associated costs that this entails. To make matters worse the changes come hot on the heels of the MMR implementation which wasn’t without its complications for everybody. Just as the market was settling down it seems that these new rules will throw things up in the air once again.

If early indications are anything to go by the directive will continue to be lobbied in its current format. With the strength of opinion that has come out against it in the UK we will surely see feedback and amends to the legislation as it stands. That does throw into doubt that the legislation will pass entirely without change. However, these things don’t just go away and the chances are that lenders, brokers and borrowers are going to have to adapt to some kind of change by 2016. Whatever the outcome, administrative and processing issues for lenders and brokers will increase.

In the meantime, the debate will continue. As is stands, lenders would be under even greater regulatory pressure from a systems and processes point of view, brokers may find it harder to place BTL business and certain small time landlords may find themselves struggling to get a loan. With the annuity changes announced in the Budget and more people feted to look to BTL as retirement income in the future this could lead to frustration for all concerned. Watch this space…

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