How the Mortgage Credit Directive (MCD) could affect UK landlords

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EU-wide mortgage legislation will take effect on 21 March. Find out what the MCD is and how it applies to the buy-to-let market.

In the pipeline since the European Commission published the final text in early 2014, the MCD will become UK law in less than a week.

EU policymakers intend to create a single mortgage market with more robust consumer protection. 2014’s Mortgage Market Review meant that the UK already had an ample framework in place, but there will still be some changes.

Some buy-to-let borrowers will count as ‘consumers’

A key problem with the MCD in relation to the UK is that it covers all mortgage lending to consumers. But buy-to-let lending and owner-occupier lending are two completely distinct markets, and the provisions of the MCD are not suitable for both.

The UK government has thus taken advantage of an option to limit the MCD’s impact on buy-to-let borrowing by putting in place an alternative regulatory framework. ‘Consumer buy to let’ (CBTL) will apply to individuals who are renting property through circumstance, rather than as for business purposes.

This could include let-to-buy transactions or gifted or inherited properties. In the government’s view, circumstantial landlords should count as consumers for the purposes of the MCD.

CBTL won’t apply in all circumstances

Under the Mortgage Credit Directive Order 2015 art. 4(4), the CBTL framework won’t apply if:

  • the client or a related person has never lived in the property, and
  • neither the client nor a related person intends to live in the property; or
  • the client owns another property that is let out under an arm’s-length tenancy or subject to a buy-to-let mortgage

Thus, existing landlords should be exempt even if they intend to mortgage a former home or inherited property. Likewise, an inherited property should be exempt if the borrower or a related person never occupied it.

Note: For the purposes of mortgage regulation, ‘related persons’ are spouses, civil partners or cohabiting partners, parents, grandparents, siblings, children and grandchildren. (The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 art. 61(4)(c).)

Business buy to let (BBTL) borrowers won’t see much change

The new CBTL rules allow borrowers to sign a declaration to the effect that they are borrowing for business purposes. Unless the lender suspects that the declaration is false, the mortgage won’t fall under CBTL rules.

Some lenders have indicated that they will ask BBTL borrowers to sign this declaration for the avoidance of doubt. BBTL borrowers should also expect brokers and lenders to ask a few more questions during the application process.

Otherwise, ordinary buy-to-let clients should see little change when the new rules come into effect.

Family buy-to-let will remain regulated

The new CBTL framework would ordinarily cover mortgages to landlords who let property to family members. However, the FCA already regulates loans of this type.

This means that there will be less of a material change for such borrowers.

What changes will there be for consumers and landlords who let to family members?

The MCD will change the Key Facts Illustration (KFI) document that lenders currently issue to mortgage customers. In its place will be the European Standardised Information Sheet (ESIS).

At some stage in the application process, a lender will need to extend a binding, non-conditional offer. They will only be able to renege on a binding offer if there is a material change to the application or if they find that the applicant has given misleading information.

A lender will then need to give the applicant at least seven days to reflect on a binding offer. The applicant may cut this reflection period short.

Second charge buy-to-let mortgages

Following the MCD implementation, second charge mortgages will move from the FCA’s consumer credit regulation regime to its mortgage regulation regime. This means that the same requirements will apply for first and second charge applicants, subject to some amendments.

This also means that certain exclusions permitted under the Consumer Credit Act will no longer apply for second charge mortgages.

As with first charge mortgages, second charge loans taken out for business purposes are exempt. Loans issued by credit unions and bridging loans with four or fewer payments are also exempt.

Foreign currency loans

There are more safeguards for loans where the borrower’s salary is in a different currency to the mortgage funds being issued. New rules include a requirement that lenders limit the risk to borrowers of fluctuations in foreign exchange rates.

The added regulation has prompted some lenders to stop foreign currency lending.

What to expect as a buy-to-let borrower

Even if the MCD does not encompass your mortgage, you may see some small changes.

Only brokers and lenders authorised by the FCA to offer CBTL mortgages can do so. Your advisor will ask further questions during your application to find out what regulatory classification should apply.

Borrowers who do fall under the consumer framework will find that a handful of lenders will no longer cater for them. But in the majority of cases, there will be little material change to the products on offer. Speaking to an experienced advisor will help you find the most appropriate mortgage for your circumstances.


Written by Ben Gosling at

Posted by on 17 March 2016

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