What are the issues that we need to address if Buy to Let Mortgages are Regulated?

publication date: Mar 11, 2010
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Article Series 1-4 - Should Buy to Let Mortgages be Regulated?
Article Four

What are the issues that we need to address if Buy to Let Mortgages are Regulated?

Regulating buy to let mortgages however, isn’t going to be straightforward and of course will incur costs, which for a lending business that is already suffering and only just getting back on its feet, needs to be thought through.

We’ve already seen tenancy deposit schemes coming into play which has cost the industry millions, hasn’t hurt or exposed any rogue landlords, penalises rather than rewards good landlords and letting agents and one of the companies has just put out invoices increasing costs by 1200%!  Basically all of these extra costs will also just end up being passed onto higher rents for tenants. So, despite the costs of regulation, in this case it’s highly questionable as to whether anyone has benefited at all.

As with our article on why we should regulate the market, here we talk to property, legal and finance experts about the issues that could happen and what those who are considering regulating the market, need to think through.
Mike Goddard, CEO of Belvoir! Lettings
Mike is at the forefront of knowledge when it comes to regulation in the lettings market. He’s not just the founder of one of the biggest and most successful franchised letting agents in the UK, he’s also on the board of the National Approved Lettings Scheme, the only government backed voluntarily regulated sector, Chairman of the British Franchise Association, but was also voted as ‘Agent of the Year’ by his peers in 2009.

During his time as CEO of Belvoir, he’s seen increased costs to the industry from the introduction of energy performance certificates, the tenancy deposit schemes, the requirement for safety certificates and insurance all being regulated. Some of it’s worked – some hasn’t made any difference and just cost the industry and of course in the end, the tenant more money!

Mike’s thoughts are that it’s only really worth introducing the costs of more regulation if it actually gets rid of the issues in the market. Would it stop repossessions? Would it stop mortgage fraud? Could it help regulate property investment company advice? If a landlord is badly advised, would they be able to recover their losses from the advisor/lender?

Mike’s thoughts are that it’s really education, not necessarily regulation, which is key. Education of investors to understand whether property investment is right for them, what the pros and cons are and what BTL investment can deliver; education of the lending market on what makes a good buy to let deal; education and a better understanding of what causes and can prevent buy to let borrowers ever ending up in repossession. It’s also important for lenders to work closely with letting agents and local surveyors to get independent and professional advice on what is the real rental potential and income stream from a buy let property.

Mike also makes an incredibly important point that should be considered alongside thoughts of regulation. Mike points out “Buy to let is now a mature market worth billions to the UK economy. More importantly, most buy to let investors and tenants want a long term, secure relationship, not one that just lasts for six months. So if we genuinely want to improve the buy to let sector through regulation, we need to not just ensure better education but also make it easier for landlords and tenants to have a longer term contract than the current six month AST”.  

Andrew Stanway, Collier UK Financial Services
Although there are potential upsides to BTL regulation, Andrew does have a fear that lenders may become too restrictive in their policies, penalising clients who are asset rich so can fund buy to lets but who can’t demonstrate non property related cash flow. This could be particularly difficult for those wanting to fund their retirement with BTL properties.

It may also lead to lenders taking a decision to divert their resources/funding away from BTL if regulation causes compliance procedure to be too onerous. If we are then left with only a few lenders, rates and set up fees may be pushed higher.

Julian Sampson, Wright and Wright Solicitors

Buy to let regulations are the FSA's first foray as part of their Mortgage Market Review into commercial lending. In principle, they seek to extend borrower protection by covering the landlord in ensuring the mortgage product they are offered is the best one for them (amongst a whole raft of other measures).

However, one of the potential 'by products' of BTL mortgage regulation is how the principle of Treating Customers Fairly will flow through to the management of the tenant in the event that the Landlord defaults and the Lender takes possession or appoints a Receiver.

Following this train of thought, letting agents might also find themselves subject to regulated considerations (such as in the treatment of the tenant or the rent assessments provided to Lenders) albeit they would probably not have to be regulated themselves.

Julian is experienced in the new FSA regulations for sale and rent back schemes and knows that the new rules introduced haven't been particularly well communicated to the property industry and comments that "lenders, asset managers, Law of Property Act (LPA) receivers and letting agents may be unwittingly walking into a sale and rent back (SARB) regulation storm".

Kate’s thoughts!
I think that before we look at regulating buy to let mortgages, those that create the ‘rules’ should firstly research what regulation needs to do to improve the buy to let market, especially from a finance perspective.

The FSA needs to consult and research information from letting agents, property investment professionals, wealth management professionals, lenders, mortgage advisors, legal companies, surveyors and independent third parties. There needs to be a greater understanding of what the key issues are, how mortgage fraud is taking place in the BTL market, the lack of knowledge and how best to educate both new and existing landlords and indeed the industry ‘professionals’ that are involved in the buy to let market.
It is important that the FSA during this process takes a serious and detailed look at the practices of property investment companies – particularly investigating the ones that have been put into administration in the last few years.

Finally, it’s essential to consider a new version of the Assured Shorthold Tenancy agreement that allows landlords and tenants that have proved they have a good working relationship, to give longer rental terms than six months without lenders feeling this might affect their power to evict tenants should a landlord end up being repossessed.

For more about FSA regulation of BTL visit: The FSA - Mortgage Market Overview and CML responds to Government proposals to extend mortgage regulation.

Take a look at previous articles 1-3 in this series:-

Article One - Why we should consider buy to let mortgages being regulated?

Article Two - What Mortgage Regulation currently exists and how does it protect borrowers?

Article Three - Why Should Buy to Let Mortgages be Regulated?

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