As lenders and intermediaries prepare for M-Day, it is becoming increasingly clear that some quirks and eccentricities of the impending regulation are going to cause consumer detriment.
One such example is in the buy-to-let market. There are strongly conflicting opinions as to whether or not B2L mortgages should have been regulated but I do not intend to discuss that here. If all residential mortgages for a year or more (mortgages for less than a year are one of the specific exclusions from regulation) were treated as a regulated mortgage contract (RMC) and all B2L mortgages were not, then one complication of the rules would be avoided. However, that would be too simple. A very substantial majority of B2L mortgages will not be regulated but a few will be. Likewise, the vast majority of residential first-charge mortgages will be an RMC but a very small minority won't be.
When drafting MCOB, someone in the Treasury or the FSA, in their wisdom (or otherwise), plucked a figure of 40 per cent out of the air and decided that if less than 40 per cent of a residential property was to be occupied by the owner or a relative, any mortgage on it would not be a RMC. Equally, if more than 40 per cent of a B2L property was to be occupied by a relative, that B2L mortgage will become an RMC.
In the first scenario if someone buys a two-bedroom residential property and takes in a lodger and they share all the facilities other than the bedrooms, the mortgage will be an RMC as the owner will occupy 50 per cent of the property. However, if the same person bought a three-bedroom property and took in two lodgers, it would probably not be an RMC as the owner would only occupy one-third of the property. However, if that same property had a big garden and the use of the garden was restricted to the owner, perhaps he would then be deemed to occupy more than 40 per cent of the property, depending on whether the garden counts.
It is not clear to me why the FSA would believe that a person buying a three-bedroom property and taking in two lodgers does not deserve the same regulatory protection when arranging their mortgage as someone taking in only one lodger.
The second scenario, however, is more common and is where most consumer detriment is likely to occur. A parent whose child is going to university might acquire a B2L property in the locality of the university for the student to occupy, along with one or more of their friends. Many lenders have been happy to offer a B2L mortgage in these circumstances. However, in the post-October 31 world, most lenders will not offer a B2L mortgage if one of the tenants is a relative. This is to avoid the risk of treating what should be a RMC as an unregulated mortgage.
One solution could be to buy the property prior to the child needing it, as the initial occupants will be relevant for this rule. However, most buyers will not even be aware of the problem until it is too late.
This is bizarre but these are the rules. To avoid the problem of deciding whether a B2L mortgage is an RMC or not, most lenders are taking a blanket approach and not accepting B2L cases where a relative is going to be a tenant.It is important for the lender to know whether or not the mortgage will be an RMC as the borrower must be given paperwork with the FSA logo on it and will have recourse to the ombudsman in the event of an unsatisfied complaint. However, if it is not an RMC, it will be an offence to give the client paperwork with the FSA logo on it.
For the purpose of this regulation, a “related person” is defined as the borrower's spouse, parents, grandparents, siblings, children and grandchildren. This also includes an unmarried partner of the borrower whose relationship with the borrower has the characteristics of the relationship between husband and wife, including a person of the same sex as the borrower.
Stepchildren, however, are not considered to be a relative. Let us look at the situation of a man who has a child, gets divorced, then remarries a woman who also has a child. Both children go to different universities. If he buys a two-bedroom B2L property for each child to occupy, the mortgage on the property occupied by his child will be an RMC but the property occupied by his stepchild will not. However, if he and his new wife buy one property in each name, both or neither of the mortgages would be regulated, depending on which child occupied each property. Confused?
But for the borrower, it is going to be Hobson's choice. Rent to a relative under the protection of regulation but little choice of mortgage, or rent to somebody else with an abundance of mortgages to choose from but no regulatory protection.
Ray Boulger is senior technical adviser at Charcol