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New EU legislation designed to deter ‘irresponsible lending’ could have a devastating affect on the buy-to-let market.
The EU draft Directive on Credit Agreements Relating to Residential Property states that buy-to-let mortgages should be regulated in the same way as residential mortgages. This legislation, if passed, is due to come into affect in 2013.
This would mean that lenders will no longer be able to take anticipated rental income into account when deciding the amount of the loan. Lenders will have to assess buy-to-let borrowers, in the same way as mortgage borrowers for residential properties, by using their income and the size of the deposit.
Around 1.4m landlords with buy-to-let loans are set to be affected by the proposed changes and some may find they cannot remortgage in two years time.
Currently, buy-to-let loans are readily available if the anticipated rental income comfortably exceeds the monthly mortgage payments. The income of the prospective borrower would not be taken into account nor would any other mortgage held on their home, or other properties in their buy-to-let portfolio.
Landlords with small buy-to-let portfolios are a significant part of this sector, and if this legislation is passed then many will not be able to purchase further properties and may be forced to sell as mortgage opportunities dry up.
This regulation would bring buy-to-let loans under the remit of the FSA.
