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New mortgage rules on way for accidental landlords

11 September 2014

Landlords face a tougher time borrowing buy to let mortgages following a surprise clause springing up in the new European mortgage credit directive.

After months of lobbying, banks and building societies were confident buy to let lending would remain outside the directive to be treated as business rather than personal borrowing.

However, European mandarins and The Treasury have written in new borrowing controls for let to buy landlords, who rent out a former home so they can move to a new one.

The directive identifies these borrowers as amateur or accidental landlords and says they must be treated differently from professional landlords by buy to let lenders.

In response to the measure, the Council of Mortgage Lenders (CML), the trade body that represents most landlord lenders, is to issue a voluntary code to banks and building societies who offer buy to let mortgages to let to buy borrowers.

The directive effectively makes buy to let borrowing a two-speed market – with one set of rules for accidental landlords and another for professionals.

The CML has indicated the code will cover:

• Identifying which set of rules should govern lending to a landlord

• Offering clear lending terms and conditions to borrowers

• Imposing an affordability test for let to buy landlords that makes sure they can pay their mortgage if interest rates rise, the letting property has no tenants or rents are paid late, especially if the borrower has a poor credit record

• Ensuring let to buy landlords understand they are running a letting business and are aware of their legal obligations to tenants
"We hope that its impact on buy to let will be limited, mainly affecting proposals for the register of firms that will operate in the sector," said a CML spokesman.

“We are disappointed by the Treasury’s proposal to implement the European mortgage credit directive by introducing regulation that would affect a small section of the buy to let market. It is not the number of borrowers affected, but the complexity of the proposals that causes concern for lenders.

“We are, however, pressing ahead with our own plans to publish a statement of practice covering buy to let.”

Many residential mortgage lenders simply give permission to let and hike the interest rate for let to buy landlords without making any affordability inquiries.

Under the directive, they will no longer be able to do so, but the CML has not clarified exactly what let to buy landlords will have to do to comply with the new rules.

The directive must be implemented by March 2016.