The Co-operative Legal Services team has joined the throng of commentators on the challenges that the EU may present to the buy to let market by requiring lenders only to consider earned income when considering affordability of buy to let lending.
At the present time buy to let mortgage lenders are not subject to the same set of rules on affordability as normal residential mortgage lending but the Co-op points out that the “proposed new rules are designed to prevent irresponsible lending by certain mortgage companies, the uniform laws could severely damage the buy-to-let market.”
They go on to explain that Conservative MEP Vicky Ford, stated: "[The EU] draft rules are deeply prescriptive, fail to [recognise] differences in different countries and could result in huge extra costs for house owners."
According to Ms Ford, "unless we are exempted from EU rules, lenders will not be able to count rental income when making mortgage offers". This will prevent those in retirement or using private savings from entering the buy-to-let market.
Paragon one of the well known buy to let mortgage lenders has recently pointed out in its annual report that
“With the social rented sector constrained, demand has inevitably focussed on the private rented sector. The Royal Institute of Chartered Surveyors noted in its latest Residential Lettings Survey that rents continue to increase, driven by high tenant demand and a shortage in the supply of homes available to rent. This was supported by the Association of Residential Letting Agents who, in their third quarter 2011 report, noted that tenant demand remained high and that in some regions the sector is nearing capacity.
This high demand is benefitting landlords who are seeing rental levels improve and are experiencing little in the way of void periods. Nevertheless landlords are not expanding the supply of rented property rapidly for a variety of reasons: there remain supply constraints on the finance available; house price weakness and tight lending criteria mean that they do not have access to the same levels of equity that were available for new purchases prior to the credit crunch; and landlords are cautious in the current economic environment and are not compelled to buy when prices are flat or indeed trending down marginally. The buy-to-let mortgage market has, however, returned to growth with the Council of Mortgage Lenders reporting that the value of buy-to-let advances increased by 37% to £12.5 billion in the course of the financial year (2010: £9.1 billion) whilst credit quality in the sector continues to improve with industry-wide buy-to-let arrears once again lower than in the owner-occupied market.
Clearly recognising the potential risk to their business they say
“We will continue to maintain an active dialogue with the UK and European regulatory authorities as any proposals develop”.
For many conveyancers amateur landlords have been key to ensuring that they continue to practice. Small landlords tend to be one of the few types of repetitive buyers of conveyaning services and it is no longer uncommon for people to have one or two properties that they let out as part of their overall financial planning.
Changes to require lenders to make buy to let lending decisions on earned income only may reduce the number of landlords who are able to buy and therefore reduce the overall demand in the market further causing an acceleration in the downward pressure on house prices.