Europe is at it again!
Not content with their crazy project "Euro" putting the whole global economy in jeopardy the Eurocrats are now looking at sticking their noses into our buy-to-let mortgage market. Please save us!
Landlords who had been investing in property prior to the 'credit crunch' will have witnessed the dramatic fall in the numbers of buy-to-let mortgage products since the peak of the market in July 2007. BTL product numbers have shrunk to about 15 percent of the 3648 buy-to-let mortgages available 'pre - crunch'.
European meddling
The EU want to meddle in our buy-to-let mortgage market reducing still further the already limited range of BTL 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 with this regulation. This will change the way landlords are assessed by their lender for their loan.
Currently in the UK a buy-to-let mortgages 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 - 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 rental void that they will still be able meet their mortgage obligations in the 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 'buy-to-let ' initiative to the investing public. Now, Europe wants us to be thrown back into the lending dark ages, pre BTL.
European Directive
The European Directive proposes that BTL 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.
Strong views
I have strong views on this. To my mind just because the social democratic 'utopia' 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 90's 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. 'But we certainly see benefit in having the buy-to-let market regulated alongside the residential mortgage market.' I'm sure she would.
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.
Even typically staid institutions such as the Building Society Association have come out completely against these proposals.
Lets hope that the Government sees sense.
Chris Horne is an experienced landlord and property professional who now runs the website Property Hawk, a site aimed directly at UK Landlords. The site incorporates free property management software that enables landlords to track all their financial data relating to their portfolio. It allows users to print tenancy agreements and other forms FREE FOREVER. The site generates a real time rent book for each property as well as calculating a landlords tax liability.