So the Mortgage Credit Directive has finally arrived. As we approached this week’s deadline there was still some confusion over how it would affect the bridging sector.
The main focus has been on second charge loans – which were formerly regulated under the Consumer Credit Act but now fall under the MCD – and getting right the post-implementation sales process.
But that is not to say the directive does not affect our sector. Certain transactions that previously would have been unregulated could now become regulated and it is important for both brokers and lenders to be up to speed on the changes and what they mean.
The good news for those operating in the non-regulated space is that many of the unregulated bridging loans written pre-MCD will remain as such. With this in mind, it is easier to summarise what remains an unregulated transaction.
Loans to businesses (UK limited companies or other corporate bodies), second charge loans for business purposes and loans to ‘non-consumer buy-to-let’ all remain non-regulated activities. In addition, loans where 60 per cent or more of the property is used for business or commercial use are still deemed as non-regulated.
Now let me explain what is meant by ‘consumer buy-to-let’, or ‘accidental landlord’. The MCD has brought certain buy-to-let activity under FCA regulation for the first time, with the intention of offering consumers entering buy-to-let mortgage contracts the protection they need under the regulated advice process. It distinguishes a consumer buy-to-let from what is deemed an experienced landlord or investor.
The term ‘accidental landlord’ is given to clients who have inherited a property that is let out, or to a borrower who plans to let out a property they have previously occupied as their main residence, no matter how long ago this was.
These borrowers now fall under FCA regulation and need to meet tougher income and affordability checks than before, much like those requiring a residential mortgage.
On the flip side, borrowers with more than one buy-to-let who operate as a limited company or other corporate entity still fall outside FCA regulation.
These so-called professional landlords will have purchased their properties with the sole intention of letting them out to provide rental income and long-term capital growth. These deals will continue to be based on rental yield and, in the case of bridging, equity in the bricks-and-mortar value.
So how does all of this affect the bridging sector?
One example would be where the applicant inherits a property that is already let out, it is their only buy-to-let property and they wish to raise finance against it to renovate it. This is now a regulated bridging loan.
In my opinion there will come a time when every loan secured on a property will be regulated. However, these things take time to implement so we are still a number of years from full regulation for all secured borrowing.
Just a few days in to the new regime it is difficult to say with certainty what the bridging market will look like from here.
I do not think much will change but having both what is and what is not regulated clearly defined can be only a good thing. Defined lines are better than blurred ones, after all.
Specialist lenders are fully prepared for any broker confusion or uncertainty. As long as the industry continues to offer fully transparent and fair advice to clients, I am confident things will start to settle down by the start of Q3, particularly as the panic and fear around regulatory changes start to fade away.