A guide to how proposed regulation may affect the buy to let market

Overview

In response to the credit crisis, the EU is now turning its attention to the buy to let market, which has up until now remained untouched by regulators. At present, lenders issuing buy to let finance are exempt from the Consumer Credit Act and instead adhere solely to voluntary Code of Conduct, which provides no legal obligation restricting how these funds are lent.

As a sector of the industry that has continued to grow despite economic pressures, regulators believe measures must be in place to protect the increasing number of people involved in buy to let transactions, from landlords to tenants. Whilst the intentions of these measures may be to provide additional security, lenders fear regulation may lack the specialist knowledge of the buy to let market and could apply consumer style protection to a commercial undertaking.

Issues surrounding regulation of buy to let featured as a central theme at the FSA seminar and lender’s debate at this year’s Mortgage Business Expo. The following summary highlights some of the key concerns and the potential changes that are likely to result from regulation which, according to the Association of Mortgage Intermediaries, is now “inevitable”. 

Proposal

As part of the European Mortgage Directive, the EU plan to bring buy to let lending in line with residential mortgages. Assessment for buy to let finance will consider current income and size of deposit, so that anticipated income from tenants will be excluded when underwriting. There will be no distinction when issuing mortgages for residential and commercial property.

Regulator’s Perspective

Whilst the FSA is pro-regulation and can see the logic behind these proposals which aim to protect tenants, it has concerns about blanket rules across a diverse European property market.

The FSA’s head of conduct policy, Sheila Nicholl said, “Niche markets are more local in character and we are concerned that there are risks involved if niche lending is governed by broad regulation designed for mainstream products - consumer choice may suffer as a result.”

Supporting this, the Legal Director of BIPAR, the trade body that represents interests of mortgage intermediaries in the EU, Isabelle Audigier said,

Lender’s Perspective

Aside from the ‘one size fits all’ debate, lenders highlight the additional costs of buy to let lending, which are likely to result from regulation. There are worries that this will lead to contraction of the buy to let sector, which has up until now, remained resilient to the shrinking of the mortgage market. Lloyds TSB’s Head of Intermediary Distribution, Peter Curran asks, “The buy to let industry is the only sign of a growing industry, so why drive up the cost?”

There are further worries that new regulation, intended to offer additional protection to consumers, will actually act against the end recipient. Paragon’s Head of Sales, Andrew Lees said, “There’s nothing wrong with regulating buy to let finance if it’s well targeted - there is a danger that the costs arriving with new regulation will be passed on from landlords to tenants.”

And worryingly, Precise Mortgages’ Managing Director Alan Cleary added, “Brokers may also be affected by these additional costs.”

However, there appears to be an overriding concern amongst lenders that planned regulation fails to address the real issue – the inexperienced landlord. Platform’s Director of Business Development, Lee Gladwell believes education should be at the heart of buy to let reforms, he said, “People need to be advised about whether buy to let really is for them. Regulating loans once advanced won’t curb this issue - some investors should potentially be investing their funds elsewhere.”

It would appear that communication from the beginning of the introduction process is what will solve the issues within buy to let. Consumers need to be adequately educated about property investment within the context of other types of investment. There is an overriding feeling amongst lenders that regulation should be concentrated more on responsible borrowing, rather than restricting lending. The latter will not prevent landlords defaulting on their repayments, nor stop the wrong people investing in the property market.

Yet, some lenders have welcomed plans for regulation which protect consumers. Precise Mortgages’ Managing Director Alan Cleary said, “Yes, buy to let should be regulated. It is necessary tenants receive more protection because they are the ones paying the landlords mortgage. At present, tenants have no control of how landlords use their funds to pay for the property they are living in.”

Yet, Woolwich’s Intermediary Business Developer David Finlay, observes that there is already a lot red tape in place so in practice not much is likely to change for those involved in buy to let transactions.

Advice

For brokers looking to issue buy to let finance, planned regulation is likely to mean two things. Firstly, the costs involved for your clients are likely to rise and worryingly, lenders may even pass this increase on to brokers in the form of lower commissions or escalated legal fees. Secondly, the amount of buy to let mortgages being written is likely to decline as borrowers will have to meet more stringent requirements to qualify for this type of finance.

What is clear is that it is now essential for brokers to diversify their existing product by having the ability to offer quality financial advice to potential buy to let investors. By maintaining high standards of advice, brokers will be providing a more stable foundation for the buy to let sector in the future. Adapting to an evolving market is what will allow brokers to remain involved within the buy to let market and seamlessly develop in to other sectors.

The planned legislation will be voted on at the beginning of 2012 and come into effect in 2013.