A little-known piece of EU legislation could see so-called accidental landlords refused cheaper mortgages - because they can't afford them.
The EU Mortgage Credit Directive, which comes into effect in the UK this month, is designed to prevent ‘risky’ mortgage lending and redefines landlord mortgages as “consumer lending”, making them subject to stricter lending criteria.
The directive introduces new mortgage affordability checks for lenders designed to ensure borrowers can afford their repayments - not just at their initial rate but also if rates were 6-7% higher.
The same rules will apply for those who are remortgaging too, meaning home-owners switching mortgage deals to take advantage of lower rates could be told that they are unable to afford repayments cheaper than those they are currently making.
The move is likely to particularly effect so-called ‘accidental landlords’ – people who did not buy a property with the intention of renting it out, but who have been forced to do so by circumstances.
Research from Direct Line has shown that 62% of new buy-to-let mortgage applicants are unaware of the changes – a figure rising to 71% for accidental landlords.
From next year changes to mortgage tax relief will also mean landlords are no longer be able to claim tax relief on mortgage repayments. Instead of deducting mortgage interest repayments from their tax bill they will instead receive a tax credit equivalent to 20% basic-rate tax on the amount – meaning that should interest rates rise some landlords could end up paying tax on losses.
Ajay Jagota, founder and Managing Director of North-East based sales and lettings firm KIS commented: “It sounds completely ludicrous for lenders to deny people cheaper mortgages because they can’t afford them, and there’s a good reason for that – it is completely ludicrous.
There is no question that this directive will create mortgage prisoners, people stuck overpaying on loans at a time when mortgage rates could be falling to their lowest ever levels.
Literally anyone can end up an accidental landlord – through inheritance, through family breakdown or through having to relocate for work. Most of the time they have no ambition other than to cover their costs until their circumstances change and there’s a real risk that they might have to raise their rents just to cover those costs.
Lenders should have the right to waive the affordability criteria when they’re remortgaging if there’s no increase in borrowing. If nothing else, this directive seems to fly in the face of EU’s commitment to a free market by denying people access to the full range of financial products available to them.”