Paragon Mortgages MD Calls for BTL Code of Practice

by Mark Alexander

11:36 AM, 5th December 2013
About 7 years ago

Paragon Mortgages MD Calls for BTL Code of Practice

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Paragon Mortgages MD Calls for BTL Code of Practice

John Heron, the Managing Director of Paragon Mortgages has been a good friend of mine for several years. Despite this I don’t agree with everything he has said in a paper he’s recently published calling for a Code of Practice for private sector BTL landlords.

To quote from his paper, Mr Heron said ….

John Heron Managing Director Paragon Mortgages

John Heron Managing Director Paragon Mortgages

“I have argued passionately for many years that buy-to-let is not a consumer product, that buy-to-let borrowers are financially sophisticated property investors and that they do not need the level of protection afforded to consumers under MCOB.”

The typical client of Paragon Mortgages may well fit this description, however, many people who enter the BTL market certainly don’t intend to own large property portfolio’s or treat BTL as their full time profession. They are just normal hard working folk who don’t trust pensions and the stock market and are looking for a home for their retirement nest egg. Many others become landlords because they move in with new partners and rent their former home as opposed to selling it. These people are consumers to my reckoning and deserve consumer protection. If things go well for these people and they go on to buy a few more properties does that make them sophisticated investors and if so at what point?

There has never been a definitive legal case which defines a landlord as a consumer. The closest I’m aware of was the case of OFT vs Foxtons which argued that a contract issued by the letting agent was unfair based on the Unfair Consumer Contract Terms Act 1999. The case was upheld which demonstrates that a landlord can indeed be treated as a consumer. However, there was no definition as to what circumstances would constitute a consumer landlord.

Some mortgage lenders base their lending criteria very much on a persons ability to support BTL mortgages from their earned income. These lenders tend to limit their criteria to financing only a handful of properties. The Principality Building Society are a very good example of this as they will not lend to a landlord who owns more than five properties. I would argue they are a consumer based lender.

The flipside to the above is The Mortgage Works who don’t pay much attention at all to their borrowers personal income and place far more emphasis, in terms of lending criteria, on the cashflow of the property/portfolio they are being asked to lend against.

I would like to see the industry develop a clear definition of what constitutes a consumer vs a professional/sophisticated landlord and for that to become a backdrop to lending criteria. Number of properties alone would not be a good enough benchmark in my opinion. If a person earning £25,000 a year was to inherit £250,000 and purchase a portfolio of 10 properties worth £1 million could they really be deemed to be sophisticated investors?

For landlords to be treated as “sophisticated investors” for funding purposes I also believe they should have a better than average understanding of what being a landlord is all about, whether they choose to outsource the management of their property portfolio’s or not. Basic knowledge can be obtained very efficiently though the landlord accreditation courses which are now run by the larger landlords associations.

Why don’t mortgage lenders who target landlords owning multiple properties make it part of their criteria only to lend to accredited landlords? Surely that would reduce their risk too?

I do agree with many of the other points made in John Heron’s paper which also touches on BTL mortgage funding being abused to purchase homes which would be deemed unaffordable on a traditional home owner mortgage basis.

You can read John Heron’s full article by completing the simple form below (available to Property118 members only – you must be logged in to see the form).

I am also interested in reading your comments, so my question is; what are your thoughts on this?

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Comments

Ian Burton

1:26 AM, 8th December 2013
About 7 years ago

Mark

Whilst I accept your comments about accountability and the legal aspects I feel it is very sad that it is encumbent on us to become effectively lawyers, accountants , etc in order that when we make a decision on whom to put our trust in we are held responsible even if we have done "due diligence" by investigating to the best of our abilities the aforesaid experts, and even then are accountable. I can (and have ) been accountable for my tenants actions even when I have never met them and paid for expert opinions on them before letting to them. I may accept this BUT I do NOT like it. Surely the tenants (and by inference the lenders) have to accept some of their own responsibilities and the government should see this and not force more and more regulation on us, but hold the tenants/lenders responsible for their own actions .

I would argue that most of us are not sophisticated investors more likely people who feel they have been let down badly by the same government that requires the above becoming of experts in all fields and so have attempted to provide incomes and or pensions by hard work on our own parts. This income (generally not huge ) is often used to support the communities that we live in by providing a valuable housing resource despite the attempts of our tenants to abuse this resource.

I feel it is possible to be an investor without being sophisticated in any way at all. Number of properties does not affect this.

One can be professional without it being ones profession, and as such I expect you or anybody else would feel aggrieved to be called not professional simply for not having the requisite bits of paper and or it not being ones prime source of income.

All in all it may not be unreasonable for anybody to be protected in some way from any other person trying to deliberately use dubious tactics to extract monies from them whether it's a consumer or a provider. We have a legal system that is supposedly blind to ones history surely its not unreasonable for it to be the same in financial matters, protection should apply to all no matter the background.

Richard Adams

10:35 AM, 8th December 2013
About 7 years ago

Reply to the comment left by "Ian Burton" at "08/12/2013 - 01:26":

Absolutely. We all hate over regulation in any sphere but when banks, building societies etc start exploiting the lack of it to extort money from the unprotected then it has to be there for us. As and when we can trust financial organisations again some time in the future - vain hope? - then regulatory control can be removed. It would be a feather in the cap of said organisations if this ever happened proving they had turned the corner and reverted to their previous trustwortihiness.

Mark Alexander

8:54 AM, 9th December 2013
About 7 years ago

Reply to the comment left by "Philip Aston" at "07/12/2013 - 16:18":

Hi Phil, apologies, I seem to have overlooked your comment at weekend.

With regards to your first response in respect of whether mortgage advisers could be held liable for being mislead by ambiguous T&C's I agree completely. Mortgage advisers are not trained lawyers. Please see >>> http://www.property118.com/important-message-to-mortgage-advisers-re-west-brom-mortgage-company/61182/

On the second point, I can't see how a landlord can contract out of his/her statutory accountability. An agent can only do what he is instructed and paid to do by his clients. If the client of the agents tells the agent has doesn't want something done or can't afford to pay for something important to be done therein lies the problem. What if the agent cannot contact his client to obtain authorisation and/or funds to necessary works? That said, I do think it would be better if lenders and property portals refused to do business with anybody who wasn't an accredited landlord or agreed to deal with an accredited agent.

Back in 1996 when buy to let mortgage products first came about in their current form the lenders insisted on them only being available to landlords who used an ARLA agent. The original BTL mortgage conditions included covenants to this effect. Somewhere along the line this got lost because highly experienced landlords made a very good case for not using an agent. An opportunity to create a yardstick to measure knowledge and experience was missed at that point in my opinion.
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