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28th November 2011

EU Regulation could hit buy-to-let mortgages

Concerns are mounting about the impending likelihood of EU regulation of the UK buy-to-let market sector, with fears that it could inflict huge damage on the private rented sector.

Critics say that regulation would restrict mortgage availability and force landlords who are unable to remortgage to sell up, with falling house prices and fewer properties to rent among the results.

According to new analysis by the Building Societies Association, EU intervention could prove disastrous.

Some 1.4m landlords with buy-to-let loans are set to be affected by the proposed changes, and some might find they no longer qualify for a remortgage in as little as two years’ time.

The new EU legislation, being brought in to deter ‘irresponsible lending’, is due to be voted on early in the new year and to come into effect in 2013.

At its heart, the EU draft Directive on Credit Agreements Relating to Residential Property says says buy-to-let mortgages should be regulated in the same way as residential mortgages.

This would prevent lenders from taking anticipated rental income into account when deciding the amount of the loan.

The EU proposals, which would bring Britain into line with Continental practice, would force lender to assess buy-to-let borrowers in the same way as mortgage applications by owner occupiers – ie, on earnings and the size of their deposit.

Currently, rental income is treated as unearned income, so would not count in calculations. 

Paul Broadhead, head of mortgage policy at BSA, said: “If rental income is excluded from consideration when underwriting BTL, then the availability of new borrowing could cease fairly rapidly. In addition, those with existing buy-to-let loans may well be unable to refinance.

“Over time this could lead to a reduction in private rented sector properties. At the extreme, current BTL borrowers may be forced to sell their property portfolios, which would have obvious implications for existing tenants and the housing market as a whole.”

Regulation of buy-to-let loans would bring the sector under the remit of the FSA and its successor, thus giving buy-to-let borrowers consumer-style protection in the event, for example, of mis-selling. The FSA appears to be ready to welcome this.

At the recent CML conference, Sheila Nicoll, director of conduct policy at the FSA, told delegates that it is for the Government to decide whether buy-to-let should be regulated. But she added: “We certainly see benefit in having the buy-to-let market regulated alongside the residential mortgage market.”