A little-known piece of EU legislation could see so-called accidental landlords refused cheaper mortgages - because they can't afford them.
The EU Mortgage Credit Directive, which comes into effect in the UK in March, is designed to prevent ‘risky’ mortgage lending and redefines landlord mortgages as “consumer lending”, making them subject to stricter lending criteria.
The directive introduces new mortgage affordability checks for lenders designed to ensure borrowers can afford their repayments - not just at their initial rate but also if rates were 6-7% higher.
The same rules will apply for those who are re-mortgaging too, meaning home-owners switching mortgage deals to take advantage of lower rates could be told that they are unable to afford repayments cheaper than those they are currently making.
The move is likely to particularly affect so-called ‘accidental landlords’ – people who did not buy a property with the intention of renting it out, but who have been forced to do so by circumstances.
Research from Direct Line has shown that 62% of new buy-to-let mortgage applicants are unaware of the changes – a figure rising to 71% for accidental landlords.
From next year changes to mortgage tax relief will also mean landlords are no longer be able to claim tax relief on mortgage repayments. Instead of deducting mortgage interest repayments from their tax bill they will instead receive a tax credit equivalent to 20% basic-rate tax on the amount – meaning that should interest rates rise some landlords could end up paying tax on losses.
