After much anticipation the Mortgage Credit Directive is finally here. Whilst lenders and brokers operating in the first and second charge market have had ample time to adapt their processes and procedures ahead of the changes, the new legislation also has implications for those advising on buy-to-let (BTL) mortgages. The introduction of the ‘consumer’ and ‘business’ BTL categories means that around 10% of BTL lending will now fall under the regulation of the FCA. If you’re a broker advising on BTL mortgages it’s important you ensure your clients receive the right protections.
Consumer vs business
The FCA has introduced the consumer BTL differentiation in an attempt to provide more protections for new or less experienced landlords, sometimes referred to as ‘accidental landlords’. Examples of borrowers that fall under the new consumer BTL category include first time landlords who decide to rent out either a previous place of residence or a property they have inherited. The majority of other lending activity involving experienced landlords and those purchasing with the sole intention to let are now considered business BTLs and will remain unaffected.
Scope for flexibility
As with most regulation, there will inevitably be circumstances where individual cases test the rigidity of the legislation and the FCA has allowed lenders a level of flexibility in interpreting which BTL category borrowers fall into. For brokers, it’s important to ensure you are aware of the legislative requirements that define consumer and business BTL borrowers and how your different lenders interpret these categories.
At Vantage Finance, we have been operating under the directive’s new requirements for a number of weeks. A good example of a case that tests the line between the two new borrower definitions is a couple that were recently introduced to us.
The couple were looking to raise finance in order to purchase a new property to move into and rent out their current place of residence. According to the new legislation this case would fall into the consumer category of borrower. However, because the couple are experienced landlords who already manage a number of rental properties, we felt they were better suited to a business BTL product.
As a consumer BTL borrower, the couple would have been treated as inexperienced landlords and subjected to the FCA’s new affordability check – something in this circumstance we felt was unnecessary due to their level of expertise in the market.
Following a discussion with the lender involved, it was decided on this occasion the application should be classed as a consumer BTL, but a case could easily be made for either category.
Know your customers, know your legislation, and know your lenders
It’s still early days, but it’s reassuring to see lenders are open to discussion on these cases. Regardless of the outcome, the most important thing is that borrowers receive the necessary protections and the most suitable product for their needs. For brokers, it’s a question of knowing your customer, the legislation in place and how your different lenders interpret this legislation. Although the majority of cases will be clear-cut, the few cases that blur the line between business and consumer BTL will require a strategic approach. Lenders are bound to remain cautious for the initial period, but I would encourage brokers operating in the BTL space to keep this flexibility in mind and consult with your lenders where necessary.
By Lucy Hodge, Director, Vantage Finance