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Yes, the European Mortgage Credit Directive is upon us. But what is it in reality, who will be affected and how?
Currently Buy to Let Mortgage Products aren't regulated by the FCA, except for a small minority of landlords who let to family members as tenants and have regulated products.
Changes have been made to residential mortgages historically, it's now the turn of buy to let.
These new changes are aimed at ensuring a consistent approach across the EU which means that those landlords who are considered most at risk will be treated as consumers, and therefore those mortgages will be 'regulated' as Consumer Buy to Let. Therefore HM Treasury and the FCA are extending their protection to parts of the buy to let world.
So what falls into the regulated consumer category? Well a typical example would be switching your home to a buy to let property, by taking a buy to let mortgage on it to let it out. This assumes you have no other investment property at the time.
"HM Treasury and the FCA are extending their protection to parts of the buy to let world"
Another example might be an inherited property where you the benefiting party have no previous buy to let experience, and subsequently take out a buy to let mortgage on that property to let to tenants.
From what we hear at The Buy to Let Broker, lenders will each have a slightly different take on what constitutes a "consumer buy to let" versus a "business buy to let", so there may be differing definitions and some early confusion, but with ourselves having strong links with all lenders will mean it shouldn't impede your route to market for long.
“There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a buy to let arrangement.
In these cases, the borrower is a landlord as a result of circumstance rather than through their own active business decision. The government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.”
Of course the main change will be the paperwork - you'll receive either an ESIS (European Standardised Information Sheet), or a KFI plus - which is essentially a KFI which added information. Lenders tell us that underwriting will be the same, and there are no other planned changes as yet in this area, but we'll reserve judgement for now.
In reality, anything which doesn't fall into the above category, by definition has to fall in to the business buy to let category, so this is life as we know it pre March 2016.
“For the majority of buy-to-let transactions, the borrower is making an active decision to become a landlord, an activity for which they will receive an income and for which they will be taxed as a business.
In addition, they will have to comply with a number of legal obligations placed on landlords, for example around fire and electrical safety standards and the use of a government-backed tenancy deposit scheme.
In the government’s view these are characteristics of a business rather than a consumer activity and therefore do not propose such borrowers need to be covered by an appropriate framework under the MCD.”
If you have any questions about how either may affect you, call us. We have the appropriate permissions in place to advise either way depending on your own position, so we're well placed to help you.