So-called accidental landlords are being warned that they could be refused cheaper mortgages, due to a lesser-known piece of legislation.
The EU Mortgage Credit Directive, coming into force at the end of the month, has been designed to stop, ‘risky’ mortgage lending. In addition, the initiative redefines landlord mortgages as ‘consumer lending,’ forcing them to be subject to tighter lending criteria.
In addition, new mortgage affordability checks will be introduced as part of the scheme. These are being implemented to ensure borrowers can afford their repayments-not only at their initial rate, but also if rates were to spiral by up to 6%.
These rules will also apply to those who are remortgaging. This means homeowners who are changing mortgage deals in order to take advantage of lower rates could be told they are unable to make repayments cheaper than what they are already making.
This move is most likely to impact on so-called accidental landlords-those who did not purchase a home intending to rent it out, but circumstances have forced them to do so.
Alarming research from Direct Line indicates that 62% of new buy-to-let mortgage applicants are unaware of the changes. This figure increases to 71% for accidental landlords.
From next year, alterations to mortgage tax relief will see landlords unable to claim tax relief on mortgage repayments. At present, landlords can deduct mortgage interest repayments from their bill. However, the changes will see them instead receive a tax credit equivalent to 20% basic-rate tax on this amount. If interest rates were to rise, some landlords could well finish up paying tax on losses.
Legislation could seriously affect accidental landlords
Ajay Jagota, founder and MD of sales and lettings firm KIS, noted, ‘it sounds completely ludicrous for lenders to deny people cheaper mortgages because they can’t afford them and there’s good reason for that-it is completely ludicrous!’
‘There is no question that this directive will create mortgage prisoners, people stuck overpaying on loans at a time when mortgage rates could be falling to their lowest ever levels. Literally anyone can end up an accidental landlord-through inheritance, through family breakdown or through having to relocate for work. Most of the time they have no ambition other than to cover their costs until their circumstances change and there’s a real risk that they might have to raise their rents just to cover those costs,’ he continued.
Concluding, Jagota said, ‘lenders should have the right to waive the affordability criteria when they’re remortgaging if there’s no increase in borrowing. If nothing else, this directive seems to fly in the face of EU’s commitment to a free market by denying people access to the full range of financial products available to them.’