Changes in circumstances are seeing more homeowners end up in the rental market. Relocation, moving in with a partner, or simple failure to sell their property are some situations that end with mainstream mortgage payers becoming landlords.
A European Mortgage Credit Directive, scheduled for 2016, will regulate certain landlord mortgages. Subsequently, the transition from homeowner to landlord will become more difficult.
Presently, buy-to-let mortgages are not subject to any regulation, in contrast to owner-occupier mortgages. As opposed to those with a homeowner mortgage, landlords are seen as business borrowers. Homeowners on the other hand are recognised as consumer and are therefore subject to tighter rules.
An example of the differences is, at present, that older people can gain easy access to landlord loans, but face stricter rules when going for a mainstream mortgage.
Becoming an Accidental Landlord is More Difficult
From 2016 however, banks will have the power to refuse rental mortgages to homeowners with no intention of using their buy-to-let property as a business investment. This change will particularly hit those homeowners wishing to keep their existing mortgage and easily transfer over to a cheaper buy-to-let rate.
However, banks will usually approve switches to landlord loans if the consumer experiences a change of circumstances. In addition, landlords may also be able to pay a small charge to maintain their residential mortgage and still let out the property.
In the future, this process may require regulation, as it will be viewed as consumer lending.
The Treasury document states: “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.
“There are some situations where borrowers do not seem to be acting in a business capacity. The Government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.”
In 2013, 151,000 buy-to-let mortgages were taken out for the purpose of house purchase or mortgaging, accounting for 12% of total lending. These figures are still considerably lower than in 2007, where buy-to-let lending peaked and 339,000 mortgages were taken out for this purpose.
The move from the Treasury has attracted criticism from industry experts, who claim that there is little need to regulate aspects of the buy-to-let industry.
Director of the Council of Mortgage Lenders, Paul Smee, said: “It is frustrating that, despite earlier assurances, the buy-to-let position turns out not to have been adequately resolved, resulting in a new proposal for regulating part of the buy-to-let mortgage market.
“The regulatory regime now being proposed is based not on any evidence of a need for additional consumer protection, but purely on ensuring that the European legal requirements are met.”
Mark Harris, Chief Executive of mortgage brokers SPF Private Clients, agreed with Mr Smee. Harris said: “A buy-to-let is an investment, whether the property was inherited, a let-to-buy or purchased independently, and should be treated as such.
“Regulating some buy-to-let loans but not others will add another layer of cost and confusion for lenders, brokers and borrowers alike.
“Buy-to-let lenders already require that borrowers meet certain criteria, including have an income, and have tough regimes in place to prevent gaming; trying to get around the new affordability rules introduced in the mortgage market review.
“Formally regulating buy-to-let is unnecessary and is not being done to provide additional protection to consumers.”