The implementation of the Mortgage Credit Directive is looming as we draw ever closer to 21 March.
A big part of these changes relates to consumer buy-to-let regulation, but there is still a lot of uncertainty among brokers on what these changes mean.
Sales director Gary Bailey of specialist lender Together explains: “Essentially, consumer buy-to-let loans will fall under regulation which provides a kind of halfway house between unregulated buy-to-let loans and a fully regulated mortgage contract – a designated middle ground.
“The aim of it is to provide more protection for consumers and it was created with ‘accidental’ landlords in mind – meaning people who had let their property as a result of circumstance, rather than part of a business plan.”
So what does it mean in practice for intermediaries? Firstly, as is the case with lenders, brokers need to register to confirm their intent to introduce consumer buy-to-let applications prior to 21 March 2016. Lenders, like Together, will check to ensure these permissions are in place for all applications received.
When it comes to deciding whether an application falls within the remit of consumer buy-to-let, there are seven questions which need to be answered:
Will the borrower or a related person occupy any part of the property?
Related person covers a spouse or civil partner, parent, brother, sister, child, grandparent or grandchild.
If any individual with any of these relationships to any of the borrowers will occupy any part of the property, the loan cannot be processed as a buy-to-let and would instead be under a regulated mortgage contract (unless business exempt rules apply).
Is the borrower an individual, partnership of three or less persons, or an unincorporated body?
The client must be one of the above to be classed as a consumer under guidance from the Financial Conduct Authority. If they do not fall into one of these three categories, they will not qualify for a consumer buy-to-let loan. Instead, the application would need to be processed as unregulated buy-to-let.
Is the purpose of the loan to purchase the property?
This is where the notion of the accidental landlord comes in, which is the main target of consumer buy-to-let regulation. If the client is purchasing the property with a clear intent to let it for profit, they are not classed as a consumer and the application must be treated as unregulated buy-to-let. However, if this was not the intention when the property was purchased and they are an ‘accidental landlord’ then consumer buy-to-let regulation applies.
The intention here is the vital distinction.
Does the borrower currently own any other buy-to-let properties?
Those who already own buy-to-let properties will be considered professional landlords under new regulation and will, therefore, not be classed as a consumer. In this case, the application will be treated as unregulated buy-to-let.
However, if the buyer has previously owned buy-to-let properties, but no longer does, they may fall into the consumer buy-to-let bracket.
Is this a ‘let-to-buy’ transaction?
The definition of a let-to-buy transaction is one where the property owner is remortgaging their current home with the intention of moving to a new home and letting out their current property, which will then become the buy-to-let security.
If this is the case, your client will be considered a consumer and the application will be treated as consumer buy-to-let.
Has the borrower or a related person lived in the property since it was last purchased?
As mentioned above, a related person is a spouse or civil partner, parent, brother, sister, child, grandparent or grandchild. If any individual who shares one of these relationships with the buyer has lived in the property since it was purchased then they will be classed as a consumer and the new regulation will apply.
Has the property been inherited?
The final question is whether the property has been inherited.
Most inherited property is covered by the question above, in that a related person has lived in it. However, there are situations where this isn’t the case, for example, where the property has been inherited by someone not classed as a related person, such as a great uncle. In this case, the buyer would be treated as a consumer. This is because the property has been inherited and was not purchased with the intention to let.
However, if multiple properties are inherited and are to be let, these would qualify as unregulated buy-to-lets.
These seven steps give a good guide to understanding the differentiation but if in doubt, brokers should talk to their lenders for clarification.
Gary Bailey concludes: “Opinions vary on how these changes are going to affect the market but certainly the main challenge is for brokers that haven’t previously been providing regulated loans, as they need to consider the implications of the requirements and cost incurred under a regulated regime, as opposed to how they’re operating at the moment.
“At Together, we’ve been regulated for over a decade so we’re in a strong position and are able to fund consumer buy-to-let loans from brokers who are accredited to do regulated business with us.”
Find out more at www.togethermoney.com