The Mortgage Credit Directive Order 2015 which came in to effect on 21st March 2016 defines a consumer buy to let mortgage contract as a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower. These include where a customer uses the mortgage to purchase a property with the intention of renting it out, has previously purchased the property with the intention of letting it out and neither the customer, nor a relative has inhabited it, or already owns another property that has been let out on the basis of a rental agreement.
The aim of the legislation is to provide a distinction between borrowers who may be ‘accidental landlord’s’, and therefore in need of consumer protection, and professionals operating a buy-to-let portfolio as a business. The legislation will also introduce a framework of conduct standards for firms advising on consumer buy to let, and all firms doing so will have to be registered by the Financial Conduct Authority.
The most common scenario where a transaction could be classed as a consumer buy to let is where a person wishes to keep, and rent out, their existing primary residence whilst purchasing a new primary residence. What we now term a ‘Let to Buy’ transaction. In some instances this will also include people who are unable to sell their existing residence either due to negative equity, or exit penalties on the current mortgage which then cannot be transferred to the new property due to a change of circumstances. Other examples include property that has been inherited and where the individual wishes to raise a mortgage on the inherited property in order to release capital for a further property purchase or to fund renovation work.
So what impact will all of this have on the ability to apply for a mortgage?
For those purchasing a buy to let property for the sole intention of renting it out to an unrelated individual there will be no change to criteria or products, and it will still be treated as a non-regulated activity. Lenders are likely to amend existing application declarations to include wording to confirm that renting it out for profit is the sole intention, or may include a new declaration that the customer will have to sign either at the time of application or upon receipt of the mortgage offer document. For consumer buy to let applications there is unlikely to be a significant change in the way lenders assess them either, however we expect more questions as to the purpose of the mortgage at the point of application. Products will be the same for consumer buy to let as they are for a standard buy to let products, except from those lenders who already differentiate let to buy and buy to let. We believe lenders who do not currently consider buy to let transactions will rule themselves out of consumer buy to let transactions.