B2L AND L2B THE NEW ACRONYM MEANS NEW PROCEDURES

FCA have made it plain in recent emails to firms getting authorised that post equity release review of June 2020 they expect much greater detailed scrutiny of buy to let and Let to Buy cases arranged by brokers.

The main reason for this is that statistically, the Let to buy market and BTL area are where there is possibly a high level of potential fraud. Why, because unscrupulous brokers arrange a BTL where the person is actually going to use the property as a main residence, because the income / affordability does not work if done on a standard residential mortgage, but with rental income, and, as with some lenders, less specific requirements for the person taking out the mortgage to have a minimum income in place, etc etc, the process is potentially open to abuse.

Similarly some wanting to rent out their own house in order to buy something else may not tell the whole truth, and rent to a family member, which is again, generally not allowed, although there are one or two exceptions. 

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Buy to let mortgages which are regulated include those where more than 40% of the property is used or will be used by the borrower or a member of the borrower’s immediate family as a residence. These are referred to as ‘Consumer Buy To Let mortgages’ and are assessed as if they were normal residential mortgages.

Another group afforded greater protection are known as ‘accidental landlords’. This is often where someone finds themselves in the market not by choice but through necessity. These include owners who may have inherited a property they now wish to rent out. It also includes those who have previously lived in their house, but now need to move, but cannot sell up. An alternative to selling is to rent the property out until the market improves, therefore, a Let to buy. 

SO WHAT ARE THE MAIN DIFFERENCES IN LENDING CRITERIA?

The lending criteria applied by mortgage providers can also very different. 

Some lenders require you to already be a homeowner and to own the property you live in, as this proves, potentially that the property being bought will be rented out and not used as a residential for own purposes. 

The maximum loan is not linked to the borrower’s personal income, which is sometimes disregarded altogether. However many lenders require the borrower to have a minimum annual income of around £20,000-£25,000, or perhaps more. This is so that they can afford temporary periods without a paying tenant (‘void periods’).

The potential monthly rental is important and can restrict the maximum mortgage available. Often this must be around 145% of the monthly mortgage interest payment on any given loan size. A common ‘nominal’ interest rate of 5.5% is used for this calculation irrespective of the actual product interest rate.

Maximum loans tend to be around 75% – 80% of the property value.

Set up and arrangement fees do tend to be higher than for residential loans / mortgages.  There are fewer lenders offering buy to let mortgages than residential.

Many buy to let loans are conducted on an ‘interest only’ basis. As the property itself will eventually be sold and can pay off the mortgage, lenders are not worried about the need for capital repayments to be made. this is very different to the residential mortgage market lending criteria.

It is often possible to have a portfolio of properties with just one mortgage lender / provider, if this is desired, or different if not.  Some schemes offer high flexibility, allowing you to pay off lump sums, underpay and take temporary payment holidays. This can be useful if you suffer temporary periods when you cannot get a tenant.

Lenders are comfortable with older borrowers, whereas residential mortgage lenders generally like the loans to be repaid by retirement, whether state / preferred etc. 

PORTFOLIO LANDLORDS

Those who own four or more buy to let properties are normally known as ‘Portfolio Landlords’, and the lending rules are again different for this group, and have different affordability requirements etc for any mortgage borrowing. Good reason to speak to a broker. 

Enhanced advice and checking processes to be adopted by brokers

The FCA are now looking for enhanced advice and checking processes to be adopted by brokers to ensure, that as far as possible, there is no possible chance of a client / customer ending up with “the wrong type of mortgage”.

In essence, this means that your process for providing advice needs to be more robust going forward, and therefore additional due diligence will be required around the advice process.

Consumer Buy to let:

The key area here is to ensure that there is no possibility that the individual you are dealing with is trying to “work the system”.

Advice process:

1. Confirm whether the client falls into the regulated or the unregulated environment, then explain why. (Should include a full discussion of what client is trying to do, and also determine “how much the client knows”).
2. Assuming a CBTL, Confirm client status in relation to the BTL, does he / she understand that in the event that the tenant defaults, that the mortgage payment still needs to be found
3. Check if they have every rented out a property before, even if a long time ago, this could affect CBTL status
4. Do they have their own property, mortgaged or not?
5. Any previous issues with mortgages. 
6. Does the client have, or has investigations been made, as to the rental market in the specific area – average rents, yields etc rental income needs to exceed the mortgage payment – could be up to 145%. 
7. Is the expected rental realistic.
8. Credit reference report to be obtained on the client or provided by the client. 
9. Is the property of the best type, 1,2,3,4 bed etc
10. Is the client going to use a rental agency or manage it themselves? In the event they are to manage themselves, this could be a warning that it could be rented to family and not to usual type tenants, as this will keep prying eyes away. 
11. Obtain an estimate from a reputable letting agent as to the expected rental
12. Establish the client’s asset position, do they have emergency funds available to complete repairs on the property etc
13. Plans for repayment of the mortgage if done on interest only.  (usually sale of property?)
14. Formal client declaration on file that he is not going to rent property out to family. 

Although you are not permitted to actually ADVISE a client if a BTL or LTB is a good proposition, you are able to ensure that you have discussed all aspects of the proposed solution. 

Let to buy:

Very similar to the above, but obviously, as the client is potentially going to “rent out main residence” to facilitate a move, it needs to be verified that that what he is actually going to do……

1. Has client considered all options, why does he not want to “sell first”? have they tried?
2. If client is desperate to buy a property that he has found, does he understand the risks?
3. Check if they have every rented out a property before, even if a long time ago, this could affect CBTL status
4. Any previous issues with mortgages. 
5. Does the client have, or has investigations been made, as to the rental market in the specific area – average rents, yields etc
6. Is the expected rental realistic.
7. Credit reference report to be obtained on the client or provided by the client.
8. If client is a company director, check companies house, and ensure that everything look correct. Check accounts / companies house returns etc 
9. Is the property of the best type, 1,2,3,4 bed etc
10. Is the client going to use a rental agency or manage it themselves? In the event they are to manage themselves, this could be a warning that it could be rented to family and not to usual type tenants, as this will keep prying eyes away. 
11. Obtain an estimate from a reputable letting agent as to the expected rental
12. Establish the client’s asset position, do they have emergency funds available to complete repairs on the property etc
13. Plans for repayment of the mortgage if converting to interest only etc. 
14. Formal client declaration on file that he is going to rent it out under a normal tenancy and not to family

Be aware, there are anomalies to the general rules around Family members depending on the status of the individual who owns the property, and the status of the family member being dependent etc.

Individual research for each case is therefore essential. 

IFAC recommend that this document is acknowledged by the customer – by signature or by email.

Click here for FF addendum on B2L that all firms should start to use