In a shock announcement from the Treasury, parts of the buy-to-let mortgage market will be regulated to meet EU rules.
The new rules, which are set out in the EU Mortgage Credit Directive, set common standards that EU members need to meet in order to protect consumers taking out loans to buy a residential property.
The Government says the legislation includes “introducing a new set of regulations for buy-to-let lending, where the lending is to consumers rather than for business purposes.”
The Council of Mortgage Lenders says the rule change will have an “unintended impact” on buy-to-let lending and says it’s disappointed that the Treasury has found it necessary to make a “U-turn” on buy-to-let.
The CML offered the following explanation about which buy-to-let loans will be regulated:
“The Treasury considers that, to meet the requirements of the Directive, it is necessary to put a regulatory framework in place for those cases where borrowers are not making an active decision to acquire a property to become a landlord, and where they do not seem to be acting in a business capacity ("consumer" buy-to-let). Examples might include cases where the property has been inherited, or previously lived in by the borrower, but the borrower is unable to sell it and so lets it instead. The proposed new regulation will only apply to relevant new loans (not existing loans), and not until March 2016.”
CML director general Paul Smee said: "With the mortgage market review out of the way, we now enter round two of regulatory change as a result of the European Mortgage Directive. We are hopeful that most of the impact should be modest, as much of it was anticipated and helpfully built in to the new rules in the first place.
"It is frustrating though 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."
The changes will not come into effect until March 2016, but the Government is consulting now in order to give mortgage firms and customers as long as possible to prepare for them. The consultation will run for eight weeks.