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Downfall of Buy-to-Let?

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Lee Tillcock – Editor of Business Moneyfacts

Could CCA 2006 cause the downfall of Buy To Let?

The last year has seen a raft of legislation impacting on the buy-to-let sector, with more new rules and regulations still to be implemented. So far the new regulation has covered areas to protect both the landlord’s and tenant’s rights. However lenders and borrowers should also be aware that The Consumer Credit Act 2006 (CCA 2006) presents potentially far more serious issues when its provisions begin to take full effect next April.

As a general rule, buy-to-let (BTL) lending is unregulated. However, it risks becoming CCA regulated once the £25,000 financial limit is removed in April 2008. In principle it has been argued that a landlord who buys just one or two properties to let may not be considered to be entering into a business transaction, but rather making a personal investment. If that was the case then the business exemptions would not apply and therefore the transaction would fall under the CCA regulations.

The rules regarding business exemption state that loans which exceed £25,000 will not be regulated if entered into solely or predominately for the purposes of a business. Clearly if the former interpretation was applied then the implications to the buy-to-let lending industry would be immense. The growing numbers of stories in the trade press have highlighted these worries with the end of the buy-to-let sector offered as the worst possible case scenario.

Ray Bolger has recently raised his concerns on the issue of the new Act, saying: “If implemented in its current form, it will crucify our buy-to-let market by imposing requirements such as banning interest-only mortgages.”

Paul Rocket, TBMC believes common sense will prevail, stating that: “The good news is that the DTI has consistently maintained that it does not intend to regulate buy-to-let and that buy-to-let will fall within the scope of the business exemption. Also the DTI has become more and more precise about this point, making it very unlikely that the fears mentioned above will come to pass.”

The general lack of clarity surrounding this issue means that it would not be clear who would and who would not be caught by this law. What constitutes a business and what does not is the key to this conundrum. The people that decide are in the Department of Trade and Industry (DTI). Thankfully, it appears that common sense may have prevailed as the DTI recently announced an amendment that should ensure that lenders are not faced with CCA regulation of loans to buy-to-let borrowers with a small number of properties.

The Council of Mortgage Lenders has called for lenders to challenge the DTI and Government on the changes. Whatever the outcome of the discussions, legal uncertainty is at the least unsettling and potentially very expensive for lenders, and subsequently consumers alike. The Government needs a very healthy private landlord market and whilst regulation has come in to protect tenants, stopping investment in commercial enterprise (which buy-to-let is) would be counter productive.

The exact rules and effect of the CCA 2006 need to be made clear and quickly, before too much speculation about the adverse consequences puts doubt into potential landlords’ minds. Simply, it cannot include banning interest only mortgages, as this would be sure a sure fire way to collapse the BTL industry. But without the full facts the industry continues to speculate, possibly turning something relatively harmless into a whirlwind of confusion. With landlords, lenders and tenants already contending with the raft of new regulation, let’s hope this latest Act is clarified sooner rather than later.

For full and regularly updated information on financial business information visit: www.moneyfactsonline.co.uk/mfBAF/root.asp

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