Red tape is good for landlords!

Christina Jordan is in favour of plans to regulate the buy-to-let mortgage market. Find out why.

This week's Turner report proposed some wide-ranging measures to improve the UK banking system, including further regulation of mortgages. The proposals are set to be consulted on later this year but the report drew attention to a number of key areas:

• It looked at possible regulation of residential mortgages, restricting borrowing on either a loan-to-value or income multiple basis -- though thankfully Lord Turner acknowledged the drawbacks of this approach, some of which I highlighted yesterday in Has the Government gone insane?)

• It mooted the idea of regulating the buy-to-let and second-charge mortgage markets, a proposal that is to be further debated.

The mortgage market came under statutory regulation in October 2004, and lifetime mortgages and home reversion plans followed in the next few years. Buy-to-let and second charge loans still sit outside the regulatory structure though have long been expected to be brought into the fold. Yesterday's announcements suggest that this is something the Government and Financial Services Authority are now seriously looking at.

But is it a good idea?

In terms of second charge lending the majority of lenders and trade bodies now agree that regulation would offer much needed advantages and transparency to the consumer.  See Cliff D'Arcy's recent article on the drawbacks of secured loans (or second charge lending), Steer Clear of Secured Loans.

But when it comes to buy-to-let, the votes are split.

The yes camp

The first thing to point out about the proposed statutory regulation of buy-to-let mortgages is that this refers to the advice and sales process. It is not intended to make getting a mortgage or becoming a landlord more cumbersome -- indeed the aim would be to protect buy-to-let borrowers and give them the same rights and redress as all mortgage borrowers.

Landlords have felt the heavy hand of regulation over the last few years, with the Tenancy Deposit Protection Scheme and Houses in Multiple Occupation legislation. But regulating the sale of buy-to-let mortgages is supposed to help not hinder landlords.

Most buy-to-let mortgage lenders and intermediaries operate across the spectrum of mortgage lending, so are actually already regulated for residential homeloans. Many lenders say they would prefer buy-to-let to come under regulation to allow them to use the same processes and systems for all their lending. Indeed many already effectively treat buy-to-let as regulated because their entire systems are set up that way and it is easier to be consistent.

It's the same with brokers, who offer all types of mortgages, although there are some buy-to-let specialists in the sector who are not authorised under mortgage regulation. They would face considerable upheaval should the sector be regulated.

But what impact would it have on landlords?

Not much in my view. The credit crunch has restricted product choice in a much greater way than regulation probably would.

On the positive side buy-to-let borrowers would know they are getting advice on their mortgage from a fully authorised and qualified broker, and that the lender is compliant with statutory regulation. And they are just as entitled to this as any other borrower.

Just as importantly, buy-to-let borrowers would gain access to the Financial Ombudsman Service if they had any complaints about the sale or advice on their mortgage. And they would have access to the Financial Services Compensation Scheme should the lender or intermediary that sold or advised them close down.

Regulation of buy-to-let would mean that lenders have to comply with strict rules on dealing with arrears and repossessions, which are rising sharply at the moment. This would offer a degree of protection to landlords (and tenants) as, in the current unregulated market they run the risk of lenders hastily moving to repossess.

The naysayers

The naysayers argue that regulating buy-to-let will not bring about any benefits for borrowers, but will increase costs dramatically.

Although a regulated sale will ensure that lenders look closely to see that landlord can achieve sufficient rent to cover the mortgage, in practice, today's cautious lenders are already doing this -- and then some.

It's a strong argument that regulating buy-to-let will not change what is already happening in the market, though it will add a massive cost burden, ultimately borne by the borrower.

However, I believe this is a short-sighted approach. It's true that lenders are currently being cautious with buy-to-let criteria but they haven't always been (just look at the current arrears levels), and when the market improves they may need the restraints of regulation to prevent them becoming over-generous again.

Naysayers also argue that regulating the market is not going to solve everything. After all, the mortgage you pick is not the only factor which determines your success as a buy-to-let landlord. One of the most important decisions is actually choosing the right property in the right area, as well as managing it and your tenants effectively.

While this is true, it does miss the point. The right mortgage will not necessarily make you a super-rich property tycoon, but it should make you at least a little bit richer.

Other naysayers say buy-to-let is a commercial transaction and should sit outside of statutory mortgage regulation. They argue that the borrower is a commercial investor and must take on the responsibilities and risks of a commercial transaction.

However, we all know that over the past decade, there has been a rapid increase in the number of buy-to-let 'amateurs', who only have one or two properties and are not professional landlords. This points to a changing market where added borrower protection is required.

Regulating buy-to-let will of course be costly, but I believe the benefits it will bring to landlords - and tenants - makes it worth the costs. Ultimately, a regulated buy-to-let mortgage market should have a positive impact on the mortgage and housing market as a whole - and right now, those markets need as much stimulus as they can get!

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