The European draft directive on credit relating to residential property does not distinguish buy-to-let loans made to residential borrowers from ordinary residential mortgages – even though in the UK a buy-to-let transaction is always regarded as commercial.
Although Paragon Mortgages doesn’t currently lend on regulated residential mortgage contracts, it does have the required permissions, so won’t be forced to apply for extra authorisation if the rules go through unamended. However buy-to-let lenders without residential authorisation may be forced either to apply for full FSA regulation to enable them to continue making buy-to-let loans to consumers, or change their models to offer buy-to-let mortgages to limited companies and commercial institutions only.
John Heron, managing director of Paragon Mortgages, said: “When considering the regulation of buy-to-let lending in recent years the UK authorities were not convinced that the benefits of protecting landlords as if they were consumers was worth the potential impacts on the market.
“It would be a travesty if having gone through this process the European dimension forced this upon us.”
The directive is still in draft form however and is likely to spend months in the committee stage where it will be subject to amendments.
Heron added: “We and others are still digesting the content of the EMD but it is very difficult to be precise about the possible outcomes because much relies on how it proceeds through the committee stages and then the European ministers and European parliament.
“It is normal for national governments to horse trade at this stage and the final legislation can be quite different as a result. There are already some significant national differences on the proposals and various lobby groups are also pulling in different directions.
“At present it would appear that the definition of mortgage in the EMD would include some buy-to-let mortgages, because many consist of a loan to an individual on a residential property. There are other elements of the legislation however that would exclude mortgages that are to be paid off through an eventual sale of the property – which is nearly always the case with buy-to-let.
“What we do know however is that the various European housing and mortgage markets are very different and are at very different stages of development.
“The UK is clearly a housing market in transition – we appear to be moving towards a more balanced model with less state owned housing, a smaller more sustainable owner-occupied market and a larger more flexible private rented sector.
“For this balance to be achieved we need a private rented sector that is free and motivated to expand. We need at least to maintain the status quo for private landlords and this means continuing the improvement we have seen in the supply of finance to private landlords.
“The imposition of European regulation on the buy-to-let market in the UK would at the very least disrupt a market that would appear to be functioning well and helping expand the much needed supply of property in this sector.
“At worst it could permanently limit the supply of finance and therefore impact on the supply of property and the level of rents.”
Robert Sinclair, director of the Association of Mortgage Intermediaries, said: “The scope of the draft directive will be a topic of discussion and whether residential buy-to-let, bridging and lending to high net worth borrowers for tax mitigation purposes should be captured by the European regulation in the UK market is something AMI will be looking at.”