In a series of recent announcements by the Treasury the Government has signalled it’s intention to improve regulation in the buy to let mortgage market. In order to prevent a recurrence of the debt fuelled buy to let boom, the move comes as a result of the work undertaken as set out in the Reforming Financial Markets paper which was undertaken in response to the credit crunch crisis.
Amongst the proposals the regulation of the investment property mortgage market and mortgages with second charges on. Buy to let mortgage products have not been as regulated as residential mortgages because they have been deemed as an investment finance product. The proposals aim to protect landlords from falling into arrears and repossessions. The vast majority of private landlords are amateur landlords and not limited companies. Unfortunately there have been many highlighted cases where property investment clubs have made unsubstantiated promises which have subsequently led to investors losing monies. The new proposals will help clamp down on such investment schemes and provide stability in the housing market.
Exchequer secretary Sarah McCarthy-Fry said: “Our focus has been to do all we can to make sure people can stay in their homes and to limit repossessions as much as possible.”. The proposals mean that there will be a split responsibility between the financial services authority regarding buy to let mortgage products and the office of fair trading regarding charges on second loans for homeowners. There has been some debate regarding the ultimate aims of the proposals. The Council of Mortgage Lenders said: “If the aim is to protect amateur property investors from poor property investment decisions, then regulating the mortgage process – as opposed to the sale process – will not necessarily address this.
Despite this proposal, the availability of products has severely contracted since the credit crunch along with the lending criteria of the remaining market providers. Landlords are simply struggling to obtain buy to let mortgage finance to invest in UK rental property. The Treasury has a consultation period which finishes in mid-February 2010.
The government faces a strategic dilemma in that it recognizes it cannot allow amateur landlords to obtain easy credit to make property investment decisions. However the importance of an expanding and healthy property market is largely dependent upon those same landlords to make sensible investment decisions and most are currently unable to obtain the finance they require due to a shortage of buyers of mortgage liquidity.