New buy to let mortgage rules mean that expats need to know whether they are professional or consumer landlords before they can borrow against homes to rent out.
Buy to let lenders will determine which category a landlord is in before they can decide how to deal with property investment borrowing.
The measure is likely to affect expats moving overseas who want to borrow against a home in the UK that they want to let out while abroad.
The Financial Conduct Authority (FCA) is responsible for policing new borrowing rules under the European Mortgage Credit Directive which come into force on March 21, 2016, although some lenders are already imposing the measures.
Are you a consumer landlord?
Instead of having a single buy to let borrowing market, the rules will split lending into two categories:
- Professional landlords who buy property to let as a business
- Consumer landlords who are likely to be landlords who are renting out a single home or a property they have lived in or inherited – which is how many expats renting out their former home are likely to be viewed.
The distinction is important because the Treasury anticipates around 11% of the buy to let mortgage market comprises consumer landlords.
They will have their borrowing worked out on affordability rules taking account of income and borrowing from all sources, which is likely to limit the amount they can have as a buy to let mortgage.
Professional landlords are likely to be:
- Buyers who buy a home to rent out as a business
- Have bought other homes to rent out as a business and neither they or a relative has lived there
- Have other properties let on tenancy agreements
Borrowers will have the option of signing away their consumer credit rights by declaring they are buying a home to run as part of a letting business and the lender is satisfied with their explanation.
Affordability checks
The rules are aimed to some extent at stopping ‘mortgage gaming’ which allows someone to purchase a home on a buy to let loan based on the expected rental income rather than the buyer’s ability to repay the loan.
The buyer or a relative then moves into the property as their main home
However, buy to let mortgage terms and conditions do not allow the buyer or a relative to live in a property used as security for the loan.
“It is also unclear how the directive will affect the market, or consumer choice,” said a spokesman for trade body The Council of Mortgage Lenders.
“It is possible that some lenders, particularly small and medium-sized firms, may be cautious about offering consumer buy-to-let mortgages. One consequence may be that consumers wanting to take out buy-to-let loans will have a narrower choice in the market, particularly in the short term.”
I am finding this situation absolutely ridiculous. If you are a UK national and passport holder all your life, opened your (in this case HSBC) UK bank account as a teenager and have a UK property and happen to be currently working abroad – (but not in the paragons of banking virtue known as the USA, UEA, Switzerland and one or two others) – you cannot get a loan, so it seems. But if you are a non-UK national and have lived in the UK for a bit – hey, no problem! The bank knows its customer of 40 years standing, it has seen the wage slips, the full property details and letting income and all the rest of it and been afforded 100% of details enabling due diligence, etc, etc. But no – no go!