What is a consumer buy to let mortgage?

The Mortgage Credit Directive, effective 21st March 2016, introduces a legislative framework for consumer buy to let. Find out what it is and what it could mean for you.

With the exception of letting to your family, the UK buy to let market is currently unregulated by the Financial Conduct Authority; however, from 21 March 2016 this will change for any transaction classed as “consumer buy to let” as the Mortgage Credit Directive is introduced.

The Mortgage Credit Directive (MCD) is a piece of European Union legislation that aims to bring together regulation of the property market, bringing with it tougher application and affordability requirements.

Most of these rules have already been implemented for residential mortgages, however buy to let has always avoided regulation until now. 

This new legislation has been brought in with the aim of providing a distinction between “accidental landlords” who may need consumer protection and “professional landlords” who operate their portfolios as a business.

A professional landlord is defined as someone already renting out a property or getting a mortgage for the specific purpose of running a buy to let business.

In this instance a Let to buy will only be a consumer buy to let if there is only one property let out. The legislation lets a borrower declare if they are acting as a professional rather than a consumer.

Business buy to let definition according to the HM Treasury:

“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.

In addition, they will have to comply with a number of legal obligations placed on landlords, for example around fire and electrical safety standards and the use of a government-backed tenancy deposit scheme.

In the government’s view these are characteristics of a business rather than a consumer activity and therefore do not propose such borrowers need to be covered by an appropriate framework under the MCD.”

Consumer buy to let definition according to the HM Treasury:

“There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a buy to let arrangement.

In these cases, the borrower is a landlord as a result of circumstance rather than through their own active business decision. The government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.”

In practice, a consumer buy to let transaction will be treated in a similar way to a residential mortgage, so more paperwork and stricter affordability tests, meaning affordability will no longer be based solely upon the rental coverage.

Lenders will have to issue a key facts document, which will be known as a European Standardised Information Sheet (ESIS).

For most of you this new legislation will not have any impact on your future applications and the majority of the buy to let market will remain unregulated.

If you think you could fall into this category and want to know more about what this means for you – do give me, or your dedicated mortgage broker a call to discuss.

Even though the rest of the buy to let sector is classed as unregulated, Mortgages for Business is a member of the NACFB (National Association of Commercial Finance Brokers), a self-regulating body that has a strict code of conduct.

Which lenders will offer consumer buy to let mortgages?

At present there are 18 buy to let lenders that will offer consumer buy to let mortgages. Each have their own conditions for example some will only lend if the client has existing buy to lets and isn't a first time landlord, but there are plenty of options out there. 

It is likely that all of those currently offering residential and buy to let mortgages will start to offer consumer buy to let mortgages, although we won’t know the finer details until the MCD comes into place.

Useful links:

HM Treasury – Implementation of the EU Mortgage Credit Directive

Regulated buy to let mortgages could scare lenders away

Updated: 01.08.2016