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21 Mar

How new EU mortgage finance legislation may affect your borrowing

Posted 21/03/2016 by: Reeds Rains

How new EU mortgage finance legislation may affect your borrowing

From 21st March this year, new rules for the UK Buy to Let mortgage market were introduced. Until now, all Buy to Let borrowing has been outside the scope of the Financial Conduct Authority (FCA), but the new EU Mortgage Credit Directive means the government will now distinguish between ‘professional’ and ‘consumer’ landlords. 

Accidental or ‘consumer’ landlords will have to take out a regulated product that offers consumer protection. While professional Buy to Let investors won’t need to do this as they will be considered to be running a business and therefore will need less supervision.

How does the legislation define a professional investor?

Someone who is borrowing wholly or mainly for the purpose of carrying on a business, such as:

  • Using the mortgage to buy with the intention of letting
  • Having previously bought a property with the intention of letting, where neither the borrower nor a relative has lived in it
  • Already owning another Buy to Let property.

If you can say ‘yes’ to one of the above – or any of the other criteria – you will be viewed as a business borrower, rather than a consumer borrower, and you will not have to take out a regulated Buy to Let mortgage.

What happens if you are a consumer landlord?

If none of the exemption circumstances laid out in the legislation apply to you, then, from 21st March 2016, you will have to take out a regulated product. For example, if you have inherited a property or are now renting out one that you used to live in yourself. The Treasury estimates that 11 per cent of existing Buy to Let mortgages could now fall into this category. 

Mortgage brokers and lenders will need to get special permission from the FCA to advise on these new regulated products and to be able to provide the mortgage loans. As a consumer borrower, you will need to go through similar affordability tests to those taking out a residential mortgage.

The good news is that the legislation does allow you to declare whether you are a consumer or a professional borrower. This means that even if you have just one Buy to Let property that you came by accidentally, and then you decide to buy a second one, you may be able to declare yourself a business landlord.

The Building Societies Association (BSA) said that they did not expect any significant impact from the new legislation. Paul Broadhead, head of mortgage policy at the BSA, said, “The BSA is still of the view that the Mortgage Credit Directive will offer little or no benefit to UK consumers, but will add cost, complexity and some confusion to the mortgage process. However, we welcome the Government’s approach to implementation. The introduction of an appropriate framework for consumer Buy to Let will keep the majority of Buy to Let lending outside the scope of regulation, minimising disruption to this market.”

Professionally trained mortgage advisors at Reeds Rains

If you think you may be affected by the legislation, please come and speak to one of our in-house mortgage advisors. You can contact them to arrange an over the phone or face to face appointment here.

https://www.fca.org.uk/firms/firm-types/mortgage-brokers-and-home-finance-lenders/mcd/cbtl 

http://www.mortgagesolutions.co.uk/news/2015/01/26/government-clarifies-definition-of-consumer-Buy to Let-regulation/  

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate some forms of Buy to Let

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