These new regulations are set out in the EU Mortgage Credit Directive and aimed at protecting consumers taking out loans to buy a residential property.
In the UK the government has already introduced a number of major reforms to mortgage lending, including creating new, stronger regulators with powers to ensure people only borrow what they can afford to repay, as well as tackle any future risks to financial stability from the mortgage market at a much earlier stage.
While the UK already complies with most of the new EU rules, the legislation implementing the directive contains some changes which include bringing the regulation of second charge mortgage lending into line with first charge mortgage lending.
The government has intended to make this change for a number of years but chose to wait for these new EU rules to be implemented, in order to avoid excessive disruption to both mortgage firms and customers introducing a new set of regulations for buy to let lending, where the lending is to consumers rather than for business purposes.
The scope of the Directive will mean that some types of buy to le mortgage will in future be captured under the mortgage regulatory regime. For example, mortgages where the owner or a family member occupies part of the property, including at university or where a property is inherited with a tenant.
However, according to a Treasury spokesman this is not expected to affect the vast majority of buy to let lending which is done for business purposes and is therefore not subject to the Directive.
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 Council of Mortgage Lenders welcomed the consultation but said it is disappointed that the Treasury has found it necessary to make what it calls a U turn on buy to let. It also calls for the minimum of disruption for buyers and lenders given that new mortgage regulations were introduced only a few months ago.
The CML points out that having previously believed that the UK would be able to achieve the necessary framework through voluntary mechanisms, the government now believes that to comply with the Directive it has no choice but to impose national law on part of the buy to let market.
The CML hopes that the forthcoming consultation from the Financial Conduct Authority will be published shortly, as that will cover the proposed detail of the changes that will most affect the mortgage market. The CML will wish to see how the FCA proposes to amend its requirements to reflect the Directive before responding formally to both consultations.
‘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,’ said Paul Smee, CML director general.
‘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,’ he added.
The Building Societies Association also welcomed the consultation and said it will be will be assessing and responding to the proposals to ensure that they do not result in unintended consequences.
‘It is clear that this Directive will add cost and complexity to the mortgage process, with no discernible consumer benefit. I am pleased that the government is taking a pragmatic approach to implement the minimum requirements to achieve compliance,’ said Paul Broadhead, head of Mortgage Policy at the BSA.
‘However, we cannot get away from the potential for further disruption and consumer confusion, so soon after the implementation of the MMR and well before its impact has been fully is analysed,’ he added.
Richard Lambert, chief executive officer at the National Landlords Association (NLA), was less complimentary and described the proposals published as part of the consultation as 'infantile, arbitrary, confusing and ultimately contradictory'.
'They imply that a lender should be subject to different regulations depending on whether their client has taken a conscious decision to become a landlord, or opted to become a landlord in reaction to a change in circumstance such as inheriting a property. This appears both impractical and unnecessarily costly to implement,' he said.
'The NLA is disappointed that the Government has felt the need to propose this arbitrary distinction between types of landlords in order to implement the EU Mortgage Directive. All private landlords are held to the same legal standards when letting property; they should have access to the same range of financial products and lending criteria. In practice this framework is likely to exclude new landlords and those requiring the most flexibility from the buy to let market,' he explained.
'While the industry pushes on with efforts to professionalise landlords and the wider sector, we're disappointed that Government instead seems intent in this instance to infantilise the business of providing homes,' he added.
