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Regulation of family buy-to-let called into question

  • 30/04/2014
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Regulation of family buy-to-let called into question
The unnecessary regulation of family buy-to-let mortgages, which has caused lenders to retreat from the market, should be reviewed brokers have warned.

Doug Hall, deputy managing director of 3mc, wants to see the government amend its definition of a regulated mortgage contract to exclude family members and intends to lobby for the change.

Under the current rules if an family member, defined as a parent, brother, sister, child, grandparent or grandchild, of the landlord is the tenant the mortgage is subject to the same assessment as a residential application.

Prior to the introduction of the Mortgage Market Review regulated buy-to-lets were assessed on a rental income calculation but were afforded the protection which comes with a regulated mortgage.

But Hall said faced with the prospect of applying a full affordability assessment to a family buy-to-let has caused lenders to retreat from the market.

“I don’t blame the lenders for not wanting to operate in this space. I blame whichever body decided to include this restriction in the rules,” he said.

“Buy-to-let should not be regulated. Why should a tenant who is a family member be treated differently than any other tenant as long as the transaction is dealt with at arms-length by using a tenancy agreement?”

Earlier this month Godiva, Coventry Building Society’s intermediary arm, NatWest and BM Solutions withdrew from the regulated buy-to-let market before the MMR rules went live on 26 April.

Coventry said it did such little business in this market it had decided not to offer the product post MMR while BM Solutions said its decision was based on offering “simplicity” to the broker’s choice.

A BM Solutions spokeswoman said: “Borrowers have the option to apply for a ‘Second Home Loan’ scheme through Halifax Intermediaries.

“This is an existing scheme and could be used as an alternative to the BM Solutions Family Buy-to-Let mortgage.

“It can be used where the property will be occupied by a family member provided there will not be a tenancy agreement.”

Hall said one perceived risk of the family buy-to-let is that it may be used as back door route to obtaining a residential mortgage.

But he said he would not understand why a landlord would want to fraudulently obtain a property for a family member who could not afford to support the loan based on their own income.

Stuart Cunningham, director of operations at broker firm Commercial Trust, agreed with Hall that family buy-to-let should not be regulated.

He said: “The nature of the transaction is no different to an ordinary buy-to-let. The tenancy is the same and the security is the same and the nature of the risk is the same.”

Cunningham said one reason that may be putting lenders off this product, is because they may believe it would be more difficult to evict a blood relative.

“There is an ethical consideration which would not otherwise be there should they need to repossess the property.”

Prior to their withdrawal landlords taking out buy-to-let mortgages for family members did not have to have a tenancy agreement in place before the mortgage completed which puts the lender’s security at risk.

The Financial Conduct Authority said the definition of regulated mortgage contract is laid down in the in the Financial Services and Markets Act under its definition of regulated activities.

Hall intends to lobby the government to change the definition so that family members fall outside the scope of a regulated contract.

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