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
“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?