Buy to Let mortgage regulation

Europe is at it again!

Not content with their crazy project bEurob putting the whole global economy in jeopardy the Eurocrats are now looking at sticking their noses into our buy-to-let mortgage market.

Landlords who had been investing in property prior to the bcredit crunchb will have witnessed the dramatic fall in the numbers of buy-to-let mortgage products since the peak of the market in mid 2007. Buy to let product numbers have shrunk to about 15 percent of the 3648 buy-to-let mortgages available ‘pre – crunch’.

The EU want to meddle in our buy-to-let mortgage market again reducing still further the already limited range of buy to let mortgage products available. As part of their proposed directive on credit agreements the EU has now set out plans to include buy-to-let mortgages within this regulation. This will change the way landlords are assessed by their lender for a loan.

In the UK, buy-to-let mortgage affordability is measured individually by assessing the rent generated by each property against financing costs. Typically a mortgage would be considered affordable by the lender if the gross rent covered between 120 b 135% of the finance cost of the mortgage. This excess cover is meant to ensure that even if the interest rate rises or the landlord suffers a void period they will still be able meet their mortgage obligations in the short to medium term.

In general it is a sensible system that aligns the affordability of the finance to the cash generative qualities of each investment property. It also allows landlords on modest incomes to be able to purchase a property without having to rely on a substantial personal income to prove they can manage their investment. This method of measuring affordability was only introduced in the mid – nineties thanks to a number of lenders getting together to introduce the bbuy-to-let binitiative to the investing public. Now, Europe wants us to be thrown back into the lending dark ages, pre buy to let.

European Directive

The European Directive proposes that buy to let lending will be regulated in the same way that residential lending is at present. However the most worrying aspect is that lenders will no longer be allowed to take into account rental income when assessing the affordability of a buy-to-let loan. The proposals are to be voted on in early 2012 and would become law by 2013.

This could have huge implications for the 1.3 million small landlords, many of which could face difficulties in refinancing their loans under the revised criteria.

To my mind just because the social democratic butopiab called Europe has an antiquated lending model that favours high net worth or highly paid individuals. They now want to impose the same stifling straight jacket on the UK. At a stroke this would exclude the young and dynamic individuals who do not earn large wages from being able to enter the property investment market.

This kind of environment was exactly the kind of lending market that I faced in the early nineties and it was only the arrival of the buy-to-let initiative in the mid 90bs that allowed me the access to finance to build up my residential portfolio.

Who is it protecting?

The question is; who is this legislation trying to protect? The latest figures from the buy-to-let mortgage market show that the current system is actually resulting in a lower rate of arrears on buy-to-let loans than on residential loans. The respective rates are currently 2.14% compared to 1.91% for buy-to-let loans. Clearly the current system is not encouraging more profligate lending to landlords than it is to homeowners. A fact that seems to be ignored by these regulators.

The real driver to all this is the desire of regulators to expand their empires! It is this cancer of bureaucracy that unchecked allows them to grow, expanding their remit and to justify more jobs, more money, more resources and bigger and bigger salaries.

Unsurprisingly in this context comments were made by Sheila Nicoll, director of conduct policy at the Financial Services Authority at a recent conference. She told delegates that it is a matter for the government to decide whether buy to let should be regulated. bBut we certainly see benefit in having the buy-to-let market regulated alongside the residential mortgage marketb.

This all flies in the face that the Council of Mortgage Lenders opinion which is against regulation. Even the UK Treasury looked at it as recently as two years ago and rejected the need to regulate buy-to-let lending.

“The EU mortgage directive is primarily concerned with the protection of consumers and this is another reason why including buy-to-let is unjustified. A buy-to-let mortgage is a commercial transaction and most landlords have enough knowledge and experience to make business decisions without protection from the law. Without any evidence of consumer detriment it seems unnecessary to impose regulation.b

Even typically staid institutions such as the Building Society Association have come out completely against these proposals.

Well that’s it then the death of the buy to let industry as we know it!B If this regulation comes in it will only be high net worth individuals that will be able to buy.

This will mean that supplies of rental property coming onto the market will be less which will mean rents INCREASE.

There WILL NOT be a sudden surge of cheap property coming onto the market for FTB’s as landlords offload property they will be unable to remortgage; due to negative equity; there might be repossessions but no one will be able to afford to buy them as buy to let won’t exist. This as residential mortgages will still be unobtainable as values are marked down by surveyors and larger deposits will be required. There are the 682000 properties that will HAVE to meet the EPC A-E standard or be withdrawn from the letting market by 2018.

Even if this is funded by the Govt ‘Green Deal’; can you see 682000 properties being at the required standard by 2108!?

There are also ALL the properties that MUST have remedial works carried out on hidden gas flues by 1.1.2013.

If the works are NOT carried out the gas installation may not be used unless the landlord wishes to risk a manslaughter charge!

What tenant is going to want to rent a place without heating and hot water from the gas installation?

Even potential buy to let investors who are wishing to use remortgage income or pension lump sums will not be able to obtain a buy to let mortgage as most of those aspiring buy to let investors will be retiring or retired.

Therefore they WILL NOT meet the income requirements for a buy to let mortgage. They would have sufficient resources under the old buy to let criteria but under the new EU scheme; not a chance.

If the govt accepts this regulation there will be a housing crisis like nothing you have ever seen.B These proverbial ‘Cathy come home types’ wonbt be renting a hovel; they won’t be renting anywhere apart from the nearest park bench!B Unless there is a massive social housing programme like in the 60’s we as a country are facing a housing catastrophe unless this ridiculous EU regulation is rejected.

Therefore anyone thinking of getting into the buy to let game; do it now and make sure you get a tracker buy to let mortgage so you do not have to remortgage for the next 25 years or longer.

Buy to let has just about managed to keep the lid on the housing crisis; take that away and we as a country will be fully exposed as ‘the emperor without clothes’!? To encourage FTB’s into the market the Govt is going to have to subsidise the market to make it affordable; say with MIRAS and assisted deposits etc. The Govt NEEDS the buy to let industry to help it with the housing crisis in the UK. Without the buy to let mortgage facility with the standard existing criteria of 125% rent to loan then the proverbial is going to hit the fan!!

One solution is to get rid of all the EU migrants and illegal immigrants and have a closed border and use an Australian type immigration system.

That will free up about 1 1/2 million properties which will mean that 1 1/2 million benefit claimants can have accommodation and go and do all the jobs that the migrants have been doing to date whilst indigenous British workers have taken benefits to do NOTHING. So you solve a massive welfare bill by forcing all the benefit claimants to do the jobs that the now departed migrants were doing!?B Simples!!

________________________________________ This is utter madness.

The property market has suffered enough and this will affect it further, because fewer of the ‘small guys’ will be able to get on the ladder. At least this will happen in the short term, because after the initial shock to the market, the rich landlords will soak up the unsold stock. This can only turn back the clock to when it was the sole domain of rich landlords.

The finance market will be delivered another killer blow, because rich landlords do not depend on conventional buy to let lending. Finance brokers, both bridging brokers and mortgage brokers, will be affected. Bridging lenders will need an exit strategy and in most cases it is buy to let. This exit route will disappear, so this will affect the bridging approval.

Central Mortgages (Essex) Ltd b 01277 630183B info@centralmortgages.net.

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