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EU rules that aim to tighten up mortgage lending may have an unforeseen impact on buy to let.
The draft EU mortgage directive covers all mortgages for residential property and sees no difference between buying as a home or buy to let.
The main issue for lenders is the directive makes them more responsible for showing a borrower can afford a loan.
Current UK financial regulation treats buy to let borrowing as a business transaction rather than a credit transaction with an individual, so the rules are laxer than those for home loans.
Because they are business deals, lenders often charge higher interest rates to landlords than to a home buyer borrowing the same amount.
The other problem is some buy to let specialist lenders are not financially regulated in the same way as residential mortgage lenders. This leads to a split in how the rules are applied across the market.
A bank or building society that lends to home buyers and landlords is regulated by the Financial Services Authority, but business finance lenders are not. One lender facing uncertainty as the directive goes through the EU Parliament is Paragon Mortgages. Others include bridging finance firms often used by property investors to complete auction or below-market-value purchases.
Paragon is not a deposit-taking lender, like a bank or building society that takes in money from savers. If the directive is approved without amending the treatment of buy to let loans, Paragon has the expensive option of applying for FSA regulation or only lending to business customers, like companies.
The latter is likely to lead to a commercial cul-de-sac as few buy to let investors would find the corporate tax regime beneficial to their property businesses.
Paragon Mortgages managing director John Heron said: “When considering buy to let regulation in recent years, the UK was not convinced that the benefits of protecting landlords as if they were consumers was worth the potential impact on the market.”
The UK has recently adopted the EU directive on consumer credit that clamps down on credit cards and unsecured borrowing, like car loans.
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