The buy-to-let market has had a mixed week. It was spared potential catastrophe after a deal was brokered to largely exempt it from Consumer Credit Act legislation but doubts remain over the suitability of sub-prime BTL.
The Council of Mortgage Lenders has secured an amendment to the act to exempt loans for buying or refinancing BTL property although it is not clear if further advances will be exempted if the extra money is not to be used for repairs.
There had been fears that the extension of the act to cover BTL could mean the end of interest-only and fixed-rate loans as CCA regulation works differently from FSA regulation.
It means the booming market, which swelled by 57 per cent last year, has overcome a major obstacle to further growth.
The CML says: “The amendment would exempt agreements that are entered into in order to provide credit of more than £25,000 to finance or refinance the purchase of land that is to be let for use as a dwelling or to finance or refinance the repair or improvement of such land or the provision of any dwelling on it, where the loan is secured on that land.
“This amendment should ensure that lenders are not faced with CCA regulation of loans to BTL borrowers with a small number of properties.”
The exemption has been welcomed by the market, not because it does not want to protect vulnerable consumers but because the way CCA regulation works could have crippled the sector.
Accord Mortgages managing director Linda Will, who reveals her firm is likely to enter the BTL sector in September, says: “The whole rationale for exempting BTL from FSA regulation was because it was a commercial transaction although there is an argument that amateur landlords need protection.
“But the CCA has a cooling-off period and that would destroy fixed rates because the most you can charge after someone ends a contract is a month’s interest so lenders would not be able to negotiate good rates as there are no redemption charges, which means that short-term fixes would be unattractive.”
John Charcol senior technical director Ray Boulger says: “The directive would have crucified our BTL market by imposing requirements which would ban interest-only mortgages.”
One cloud has been lifted but another remains. Paragon Mortgages managing director John Heron, speaking in his capacity as chairman of the Association of Residential Letting Agents’ lender panel, waded into the debate on sub-prime lending by stating that caution must be exercised on adverse BTL deals that are becoming more prevalent.
Heron says: “Sub-prime products in the mainstream market developed in response to people’s needs for a home. With buy to let, stretching the criteria must be treated with more caution. It may be acceptable to lend to a landlord who has some adverse credit history. However, does a BTL investment make any sense for an individual with a long track record of default and financial mismanagement?
“As a market develops, inevitably some participants push the boundaries. I firmly believe that as the market attracts new participants, lenders and brokers have a responsibility to ensure the high standards are not compromised. This includes looking carefully at product and policy developments and challenging whether they are appropriate.”
Heron’s fears are supported by solicitor Harriet Quiney of legal firm Fishburns. She says: “Some people rush into BTL. A lot of it is because of what they see on TV about getting rich quick and people do not appreciate what they are doing. Sub-prime for those people is not a good idea.
“A lot of people can get into a mess. If they cannot afford to pay their gas bill, how can they afford what goes with a BTL like repairs and renovation? What happens in a void period with no tenants? It is even worse when the rental cover is only 100 per cent as you have so little breathing space.”
A number of lenders have extended their criteria by moving to 90 per cent loan to value on BTL. Rooftop, whose fees can be added even if it takes the loan above 90 per cent, is one of those lenders. It requires no proof of rental or earned income and no minimum rental cover.
The biggest BTL lender, BM Solutions, offers rental cover as low as 100 per cent. Spokesman Matt Grayson says: “BTL investors are experienced homeowners. Many earn over £45,000 a year with an average deposit of 35 per cent. These products are about providing more choice. It is also why intermediaries are important as they can sit down and talk to people about their options and choose the right deal.”
Broker Chase de Vere Mortgage Management director Nick Gardner says: “There is nothing inherently wrong with sub-prime BTL. Sometimes, someone may not have paid a parking ticket and they get a CCJ, so why should that stop them getting a BTL?
“If someone then has a couple of months’ arrears as they have moved jobs, it does not mean they will be unable to afford payments. It is more choice for people. It depends on the severity of the financial problem but the idea of lending to people with adverse credit should not be dismissed.”