New regulations for buy-to-let mortgage lending
(by Kate Harrison)
The implementation of the EU directive on credit agreements for consumers relating to residential property has been a matter of concern to the UK mortgage industry, not least because it follows so soon after the Mortgage Market Review and the implementation of the new regulations for the assessment of potential borrowers. On 26 January 2015, HM Treasury published the draft Mortgage Credit Directive Order 2015, which implements the Mortgage Credit Directive (2014/17/EU) (MCD) in the UK. The draft Order includes amendments to legislation including the Financial Services and Markets Act 2000 (FSMA), the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO). The Order will come into force on 21 March 2106.
In the published summary of responses to the consultation carried out with industry on the implementation of the MCD, comments made by HM Treasury reveal an intention to make use of existing legislation wherever possible to minimize the costs of compliance.
There had been particular concern that all buy-to-let lending would have to come within the regulated mortgage regime.
Under the current legislation the test as to whether a buy-to-let mortgage should be regulated relates purely to the extent of owner occupation. If less than 40% of the property is occupied as a dwelling by the borrower or their relative, this will not be a regulated mortgage contract. This limitation on the owner’s or relative’s occupation was at odds with the MCD, since this only permits a buy-to-let mortgage to be excluded from the full requirements of the directive, where as a term of the loan agreement, the property may not be occupied at any time by the borrower or a family member. To retain the limited occupation rights of the borrower/and or a family member the government has had to make use of the exemption within the MCD which applies to loans taken out where the use is predominantly for business purposes. This change in qualification means that regard must now be had to the borrower’s intended use when the property is bought.
To avoid the loan being classed as a consumer buy-to-let loan and falling within the regulated mortgage regime, the loan agreement must include a statement confirming the following:
(i) that the agreement is being entered into by the borrower wholly or predominantly for the purposes of a business.
(ii) that the borrower is aware that its consumer rights have been excluded.
(iii) that the borrower should seek independent legal advice if in any doubt as to whether the loan is regulated.
A borrower will be regarded as entering into an agreement for business purposes if the agreement contains the required statement and the borrower has either purchased the property or is buying it, in both cases, with the intention to let it out and not for the borrower or a family member to live in. If the property is already in the ownership of the borrower when he/she enters in to the agreement, the borrower or a family member should never have lived in the property when the agreement is made unless the borrower owns other property which is either let out (not to a family member) or is subject to a non-regulated buy-to-let mortgage.
The lender is entitled to rely on the statement without having to prove that it is accurate unless the lender knows or has reasonable cause to suspect that the agreement is not being entered into primarily for the purposes of a business carried on or intended to be carried on by the borrower.
Whilst the majority of those requiring buy-to-let loans will have acquired their property with the sole intention of letting it out on a commercial basis, there will be a small minority who become landlords by circumstance, perhaps through inheriting a property or no longer needing or being able to live in a property which is proving difficult to sell. Nevertheless, however low the number of borrowers who would be classed as “consumers” may be, lenders find themselves having to engage, yet again, in the expense of updating their products and training.