The buy-to-let market is thriving. Going into the second half of 2014 it is likely this trend will continue as a result of the recent Mortgage Market Review (MMR). As buy-to-let falls outside of MMR regulation, applicants may find they undergo less stringent affordability tests compared to those required for a residential mortgage.
However, the fact buy-to-let does not currently come under the MMR guidelines has sparked some concern in the industry. One issue voiced by the FCA at its recent Financial Crime Conference, relates to the possibility of mortgage advisers using buy-to-let as a ‘back door’ for owner-occupied property sales where the borrower is not eligible for a traditional residential mortgage under the stricter stress test rules now imposed.
Despite this concern, the situation is not common practice in the industry. The majority of mortgage advisers already conduct thorough rate shock tests with borrowers and use the same fact-finding sessions as those required by the FCA under the MMR when processing buy-to-let applications.
The effects of buy-to-let regulation on the market
So what would the buy-to-let market look like if these products were regulated? While many mortgage advisers already carry out detailed affordability tests when processing a buy-to-let application, this would need to be evidenced in a compliant way.
If buy-to-let fell under the MMR, one of the key changes would be the majority of borrowers would have to receive an advised sale, with lenders and mortgage advisers needing to provide audit trails to prove they have offered a product that is appropriate to the customer’s specific circumstances, and that the borrower understands their obligations towards mortgage repayments.
With the above in mind, many mortgage advisers would not be particularly affected by any rules the FCA might impose on buy-to-let products in terms of the questions and checks they have to undergo with borrowers. However they would be likely to experience an increased administrative burden demanded by the proof of audit.
Managing potential buy-to-let regulation
As it stands, 40% of buy-to-let landlords only have one or two properties in their portfolio, according to the Association of Residential Letting Agents’ Survey of Residential Investment Landlords. This indicates for most landlords, buy-to-let is not a large-scale commercial venture.
When it comes to applying for a buy-to-let product, some current systems require the mortgage adviser to duplicate the borrower’s information rather than utilise details already filled out for a residential mortgage.
This increases the workload for the mortgage adviser, who would need to create a new application. However, this issue can be negated if the appropriate technology is used as some systems help to minimise this with the data shared across products.
The future
One concern around bringing buy-to-let products under the MMR is projected mortgage lending would decline. In the current market, some lenders may look to buy-to-let as an alternative revenue stream to residential mortgages, with the increased processing time in order to remain compliant with new regulation.
However, according to Council of Mortgage Lenders’ latest figures, the value of buy-to-let lending is still significantly lower than house purchase loans. In February 2014, buy-to-let lending totalled £1.9bn, compared to £7.8bn in the residential market.
Undoubtedly, buy-to-let looks set to be a sector of growth this year. Mortgage advisers who are already carrying out strict affordability tests on these products would be in a strong position to easily absorb any extra regulation this market sees.
