How will the MCD impact the bridging finance market?
It’s only a few months until the European Mortgage Credit Directive (MCD) is implemented and the bridging finance industry is already gearing up to address a new set of rules which will expand the range of what constitutes regulated lending activity.
The MCD will come into effect from 21 March 2016. Lenders and brokers alike need to be up to speed with the new concept of what constitutes a “Consumer Buy to Let” and what exemptions will continue to apply post March 2016.
A significant amount of existing lending activity will continue to remain outside of the Directive and thus will continue to constitute unregulated lending activity. This includes:
- Lending on non-consumer buy to let property
- Loans to limited companies or other bodies corporate
- Loans to businesses
The key issue is the introduction of the concept of a consumer buy to let property, or the “accidental landlord”. In simple terms, from March 2016 brokers and lenders wishing to engage in BTL unregulated activity need to be satisfied that the security property has never been occupied by the borrower, or any member of their family, at any point, unless the borrower has at least one other buy to let property in addition to the security property.
It is a common occurrence that a property portfolio begins with the retention of one’s existing property (which then becomes an investment property) on the acquisition of a new property. From small acorns do great oaks grow. The immediate impact of the MCD is to deny this first time landlord access to commercial unregulated sources of funding which could be used to renovate, extend, develop and add further value to the investment property.
Whilst the concept of the consumer buy to let does pose some potential issues, certain exemptions from the MCD will continue to apply going forward. Any loan wishing to take advantage of the exemptions must fall within one of the following categories:
– A bridging loan which is to be secured by way of a second legal charge over the borrower’s home where the loan is over £25,000 and is predominantly for business purposes
– Loans to individuals to be secured over commercial property and/or semi-commercial property where 60% or more of the premises are used for business purposes.
According to Bridging Trends data, the quarterly data publication conducted and compiled by MTF and a number of the industry’s leading packagers, to monitor the latest trends in bridging finance- a significant percentage of bridging loans are presently unregulated.
Unregulated loans in the third quarter of this year made up for 68% of the £131.7 million lending transacted by Bridging Trends contributors. An increase from 53.3% in Q2 2015.
Bridging finance is a specialist financial tool which is designed to fill the gaps left by the banking sector. The ability to take a commercial approach allows unregulated lenders the flexibility to assist property investors and SMEs in a way the banking sector cannot. An increase in regulation in the bridging finance sector threatens to hamper a much needed source of liquidity, once again creating a liquidity gap.
At MTF one of our defining characteristics is that we are non-status lenders. This allows us to take a practical, common sense approach to lending and offer sophisticated borrowers opportunities that aren’t available in the regulated sector.
By way of example we were recently approached by a borrower who had purchased a property in Brixton, under the Right to Buy Scheme, in which she then continued to live for a number of years.
When the borrower decided to move and buy a new home, she decided to keep that property as an investment and put in place an assured short-hold tenancy.
Earlier this year the borrower had the opportunity, pursuant to planning permission obtained and consent from the Local Authority, to convert an annex at the property so as to add an additional bedroom. Not only would these improvements add capital value to the property, they would enable the borrower to procure a better rent.
Although the asset had ceased to be income producing in anticipation of the work, and without being constrained by affordability criteria, MTF were able to provide a £285,000 bridging loan at 64% LTV on open market value to the borrower, which released sufficient funds for the project to be completed.
This case is but one example of how the implementation of the MCD will impact the market. The additional regulation means that post-MCD, this borrower will be classified as an accidental landlord. They may well find obtaining access to commercial, flexible funding more difficult.
To what extent the MCD will have a large or relatively small impact on the buy to let market remains an interesting question to be answered in 2016. At MTF we remain committed to offering sensible, flexible, unregulated bridging finance loans designed to save or make our customers money.