European Mortgage Credit Directive
Yes, the European Mortgage Credit Directive (EMCD) is now in full force, but what is it in reality, who is affected by this and how?
Currently buy to let mortgage products aren’t typically regulated by the Financial Conduct Authority (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, but with the EMCD, it was the turn of buy to let.
The changes were brought into ensure a consistent approach across the European Union, so that those landlords who are considered most at risk are treated as consumers, and therefore those mortgages will be ‘regulated’ as consumer buy to let. Therefore HM Treasury and the FCA extended their protection to parts of the buy to let world.
Consumer Buy to Let
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.
Another example might be an inherited property where you the benefiting party has no previous buy to let experience, and subsequently, takes out a buy to let mortgage on that property to let to tenants.
Lenders 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 confusion, but with ourselves having strong links with all lenders means it shouldn’t impede your route to market and we can clarify this for you.
Consumer Buy To Let definition (according to the HM Treasury)
“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 that was brought in was the paperwork – when you enquire for a new mortgage product you’ll receive either an European Standardised Information Sheet (ESIS), or a product illustration plus – which is essentially a product illustration with added information.
Business Buy to Let
In reality, anything which doesn’t fall into the above category, by definition has to fall into the business buy to let category, so this is life as we know it pre March 2016.
Business Buy To Let definition (according to the HM Treasury)
“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.” – (source: gov.uk – updated 26 Jan 2015)
If you have any questions about how either may affect you, call us to discuss further.
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