With the MCD deadline just a few days away, there is still some confusion over how this could affect the bridging sector. The main focus has been on the regulation of second charge mortgages that were formerly regulated under the Consumer Credit Act, but now fall under MCD. Unsurprisingly, the majority of the focus has been getting the post MCD sales process right for secured loans.
That is not to say that MCD does not affect the bridging sector, as certain transactions that would previously have been unregulated could now become regulated under the new regime. Equally, it is important for brokers as well as lenders to be up-to-speed on what these changes mean for our sector.
The good news for those lenders and brokers operating in the non-regulated space, is that many of the currently unregulated Bridging Finance that are being written today (pre-MCD) will continue to remain unregulated post MCD. It is therefore easier to summarise what will not be affected and therefore remain as an unregulated transaction.
Loans to businesses (UK limited companies or other corporate bodies), second charge mortgages for business purposes and loans to ‘non-consumer buy-to-let’ will all remain non-regulated activities. In addition, loans where 60 per cent or more of the property is used for business or commercial use will still be deemed as non-regulated.
Let me explain what is meant by ‘consumer buy-to-let’ or ‘accidental landlord’. The MCD brings certain buy-to-let activity under FCA regulation for the first time, with the intention of offering consumers who are entering in to buy-to-let mortgage contracts the protection they need under the regulated advice process. It will distinguish a consumer buy-to-let vs what will be deemed an experienced landlord or investor.
The term ‘accidental landlord’ is given to clients who have inherited a property that is let out or a borrower who plans to let out a property that they have previously occupied as their main residence, no matter how long ago this was. Under MCD these borrowers will fall under FCA regulation and borrowers will need to meet tougher income and affordability checks than they currently do, much like those requiring a residential mortgage now.
There will be a number of borrowers who have purchased a property on a residential basis, lived in it as their main residence for a number of years and, when they have moved up the property ladder, decided to let it out rather than sell it. I did exactly this about ten years ago and, with only the one existing investment property that I formerly lived in, this would now be deemed a consumer buy-to-let and would fall under FCA regulation.
On the flip-side, borrowers with more than one buy-to-let who operate as a limited company or other corporate entity will still fall outside of FCA regulation. These so called ‘professional’ landlords will have purchased the property with the sole intention of letting it 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 this affect the bridging sector? One example would be where the applicant inherits a property from family that is already let out and it is their only buy-to-let property and they wish to raise finance against it to renovate it. Under MCD this would now be a regulated bridging loan.
In my opinion, there will come a time when every single loan secured on a property will be regulated, although these things take time to implement and therefore we are still a number of years off full regulation for all secured borrowing.
Although it is difficult to say with certainty what the post MCD bridging market looks like, I do not think much will change, but it will clearly define what is and isn’t regulated and this is a good thing. Clearly defined lines are better than blurred ones and one thing is for sure, we don’t have long to wait.
Many specialist lenders are now fully prepared for any broker confusion and uncertainty. As long as the industry continues to offer fully transparent and fair advice to its clients, I am confident that things will start to settle down by the start of Q3, particularly as the panic and fear around regulatory changes start to fade away.