Buy to Let regulation – The EU and CARRP

Buy to Let regulation – The EU and CARRP

10:23 AM, 19th April 2012, About 12 years ago 5

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Our most popular article to date in terms of both debate a viewers was the prospect of the EU regulation of buy to let and how it would affect the UK markets.

The whole issue of buy to let regulation has been hot news over the last few days with Nationwide specialist lending arm “The Mortgage Works” having released the video debate below and also the announcements from the National Landlords Association which are featured below TWP’s video.

Read more on the Credit Agreements Relating to Residential Property draft on EU buy to let regulation.

EU buy to let mortgage regulation comes a step closer

Landlords planning to refinance should set the ball rolling now as controversial proposals to regulate buy to let mortgages go before the European Commission.

The draft Credit Agreements Relating to Residential Property (CARRP) is due for first reading in committee at the European parliament on April 25.

If the draft passes committee, the full parliament still has to vote on implementation later this year.

Passing into law will mean buy to let mortgage applications are considered for approval in the same way as standard home loans.

The issue throws up severe financing problems for landlords –

  • Banks and building societies may have to restrict loan to value on interest only lending
  • Borrowing would be restricted by the landlord’s other income and would not be calculated on rents coming in from tenants.

The directive has little or no effect on buy to let lending in other countries as they either have no market or run the same way as residential mortgages in the UK.

The buy to let lender trade body, the Council of Mortgage Lenders and the Association of Mortgage Intermediaries, which speaks for brokers, have both protested long and hard against the proposals.

Both argue that buy to let in the UK operates as commercial borrowing and should continue to be assessed in that way.

Nevertheless, landlords should write in to their business plans that mortgage regulation and availability may change in 2013, and this could limit remortgages or loans to buy new properties.

David Cox of the National Landlords Association is quoted in Investor Chronicle as being “quietly confident” buy to let loans will be removed form the next draft.

“The bill is about protecting consumers, but buy-to-let loans aren’t consumer loans, they’re business loans.” Mr Cox said.

For landlords with plenty of equity who want to extract cash from their portfolio, the next few months could be the last chance to raise the cash to expand a portfolio.

The CARRP timetable proposes the second and final reading of the directive should take place in September – and the provisions are generally adopted in to law around 12 months later.

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11:01 AM, 19th April 2012, About 12 years ago

The problem is you can't have it both ways - if B2L mortgages are to be regarded as commercial lending, then landlords should really have their properties owned under a company.

Excessive lending is largely responsible for the problems in the property market at the moment - rents can only rise so far before they become unaffordable, then, when interest rates rise - all of a sudden the yield just isn't there.

At the moment it appears the mortgage industry is simply creating products just to create demand - a situation that is unlikely to have a happy ending for anyone - more on the subject here

Mark Alexander - Founder of Property118

16:43 PM, 19th April 2012, About 12 years ago

I really don't follow this logic. Are you suggesting that to claim a legitimate business expense (mortgage interest in the case of a landlord) that all business should be limited companies? That would be ludicrous. Take your argument to it's natural conclusion and you are effectively suggesting that every part time window cleaner would have to become a limited company to offset the cost of his ladder against his income! All solicitors partnerships would have to incorporate etc. etc. etc.

17:08 PM, 19th April 2012, About 12 years ago

In the conclusion you suggest there Mark, the part-time window cleaner would have no need to be a limited company because the turnover created would likely be low enough to not need to VAT returns and also because, as you say - it would not be viable. Said window cleaner would probably operate under a "trading as" status.

However - if same said window cleaner goes to the bank for a business loan to expand and buy more ladders - and if he remains under the "trading as" status - the loan will be dependent upon his provable income. On the other hand, if he becomes a company - the loan then becomes a commercial loan and is subsequently based upon company turnover/future earnings etc.

Mark Alexander - Founder of Property118

17:49 PM, 19th April 2012, About 12 years ago

Said window cleaner could go on to employ thousands of people and raise millions in debt to buy vans, ladders etc. as a sole trader. He would still be quite entitled to set off legitimate business expenses, including and loan interest, against his income. Why should this be any different for landlords?

19:37 PM, 19th April 2012, About 12 years ago

If this regulation is introduced the BTL industry will effectively disappear overnight.
LL should ensure that they have mortgages set up so that they do not need to remortgage for the next 25 years or even longer
They will have to forget remortgaging as the criteria will be so restrictive.
The only way they will be able to release capital to purchase is to sell; but as a additional loan would be unlikely what is the point.
LL will have to accept their present position; that they can go no further with advancing their business.
Obviously to increase yield and consequently possibly increase income then the only recourse is to pay down mortgage debt.
That is not really tax efficient though is it!?
The only hope is as Mark has suggested is being worked on a way via ltd companies of private LL being still able to get round these stupid EU proposed BTL regulations
Lets hope so as otherwise the letting industry for small LL is finished.

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