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European legislation will make it harder for “accidental landlords” to borrow
Buy-to-let investors and mortgage lenders remain angered and bemused by EU legislation that could leave some owners of second properties struggling to find a loan.
This undefined group could include those home owners unable to sell their property or financing a house move.
Even experts are unclear over exactly who will be affected by the new European Mortgage Credit Directive, which lenders have deemed "problematic and unnecessary". The Council of Mortgage Lenders, representing the mortgage industry, made a desperate appeal this week for the Treasury and the financial regulator, the Financial Conduct Authority (FCA), to clear up the confusion.
Any borrower deemed a "consumer" and not a "professional" will be caught by the new legislation. But no one knows what this distinction means. According to the Treasury, consumers include borrowers who become landlords "as a result of circumstance rather than through their own active business decision". Even that is not clear. But professional landlords who derive most or all of their income from their property investments won’t be affected. These are "companies or individuals who are acting in the course of their trade, business or profession".
Currently, a buy-to-let mortgage requires that the property is not occupied at any time by the borrower or a family member.
Unlike residential mortgages, buy-to-let loans are outside the scope of FCA regulation, and do not require the strict affordability tests imposed on owner-occupier lending.
Europe has yet to disclose the scope of the rules. But there is speculation that it could be similar to new lending criteria – introduced in April – imposed on residential mortgages.
The so-called mortgage "stress test" requires banks to assess borrowers’ incomes and spending habits in forensic detail, and ensure applicants can afford repayments in the event of a rise in interest rates. Mortgage broker Ray Boulger of Charcol warned that the move would increase costs for buy-to-let borrowers and would be "the opposite of being consumer-friendly despite being positioned as a consumer initiative".
"As far as the UK is concerned, it is another example of the EU interfering in our domestic business," he said.
Mr Lethem, an IT consultant from London, financed his city-to-country move by remortgaging and letting out his existing property. He and his wife, Wendy, wanted to keep their property in London.
The dilapidated condition of the five-bedroom Victorian house that they wanted to buy in Kent, meant the couple could not secure a mortgage against it. They would either have to sell their London property or take out a buy-to-let mortgage against it and let it. "We fell in love with [the property], but didn’t know how we would get hold of it unless we were cash buyers," Mr Lethem said.
The Lethems could be caught by the new rules, because for years the property was their main home. This is despite their active choice to become landlords.
The Lethems opted to borrow approximately £420,000 from Clydesdale Bank, through broker Private Finance, which lent on a two-year fix at 3.39pc.
David Hollingworth, from broker London and Country, said that while it was unclear, he expected borrowers in the Lethems' case to be unaffected. "It would seem sensible for it not to be caught out by regulation but we shall have to see how boundaries are defined."
Other borrowers may also escape by declaring that they are professional and not consumer landlords. But the onus would lie on lenders to assess whether borrowers were telling the truth. Mr Hollingworth said: "Lenders may not use customer declarations, at risk of falling foul of the regulator."