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Mortgage FAQ: What’s a consumer landlord?

5 November 2015

Strict new mortgage borrowing rules are on the way next year they will make buy to let borrowing tougher for at least one in 10 landlords designated as consumers rather than professionals.

The European Mortgage Credit Directive comes into force on March 21, 2016 and here are some answers to frequently asked questions about the changes:

Who is a consumer landlord?

A consumer landlord is likely to be an investor with a single letting property, such as a home they have inherited or a former home they lived before moving to their current home.

What difference will the directive make to consumer landlords?

Lenders will impose much tougher affordability tests. Not only will the buy to let home have to pass a rent cover stress test, but the borrower will have to show they have enough income from other sources to cover the mortgage if the property is not tenanted.
Borrowers will also have to explain the reasons for renting out a property, how they intend to repay the loan and promise that they will not live in the home while a buy to let loan is secured against it.

What is rent cover?

Rent cover is a formula applied by lenders to make sure the likely rent a buy to let generates is enough to cover the mortgage without the borrower having to find money from other sources to pay for the loan.

Generally, rent cover is 125% of the interest only mortgage repayment, although the percentage can vary between lenders.

Who is a professional landlord?

A professional landlord is an investor who runs a property portfolio as a business. They will not be subject to consumer landlord affordability rules but any mortgage applications must still pass the rent cover test.

How will this impact buy to let borrowing?

Some lenders are already imposing consumer landlord tests on borrowers even though the directive does not come into force until March 2016.

The Council of Mortgage Lenders, the trade body for buy to let lenders, says some lenders are planning specialist mortgage deals for consumer landlords.