In 2007 the European Commission adopted a White Paper on the Integration of European Mortgage Markets. The aim was to integrate the mortgage markets across the European Union so that individuals buying property in multiple member states would do so under a broadly similar legislative and regulatory framework. The idea was good in principle. It meant, for example, that someone from Germany would be able to buy property in France without needing specialist knowledge of the French legal system and that they would be safeguarded against accidentally falling foul of any unusual regulations imposed on French mortgage products.
These proposals became more politically urgent when the financial crisis hit Europe. In response to the crisis, and in the context of efforts to ensure an efficient and competitive single market, the EC brought forward measures on responsible lending and borrowing, including a reliable framework on credit intermediaries. However, when it introduced the legislation into the European Parliament, the EC had underestimated the diverse nature of Europe’s mortgage markets as many member states have specialised and extremely nuanced mortgage products, such as buy-to-let mortgages in the UK and Ireland.
Therefore, while the concept of harmonising the mortgage market across Europe was a positive and welcome step for property owners, the mortgage directive – officially known as the Credit Agreements Related to Residential Property Directive – attempted to create a single regulatory framework that would govern all mortgages within the EU. Had the directive passed into law in its original form it would have had fundamental and far-reaching consequences on mortgage markets in many member states and would have been extremely detrimental to the large number of landlords with buy-to-let portfolios in the UK.
It is important to remember that the UK’s private-rented sector is made up of a large number of individual landlords, with many owning two or three properties. It is heavily dependent on mortgage finance, with buy-to-let mortgages outstanding on approximately 38 per cent of all private rented properties in the UK. In its original form the directive would have had a devastating effect on the availability of suitable and sustainable buy-to-let finance.
When the directive was first published, the key issue for landlords was the credit worthiness provisions – the rules governing when a mortgage lender may, by law, offer mortgage credit. Most lenders operating in the UK’s buy-to-let sector base their credit worthiness decisions on a combination of rental income and property value. The landlord’s personal income is irrelevant in the lending decision. However the EC had drafted the directive so that all mortgage applications would require the buyer’s personal circumstances to be taken into consideration. It had even gone so far as to specifically exclude potential rental income from the credit worthiness provisions.
The rental income clause was removed shortly after the European Parliament’s economic and monetary affairs committee began its deliberations on the text of the directive. However it had not fully understood that requiring mortgage companies to take a landlord’s personal income into consideration as part of every lending decision would have rendered the entire concept of the buy-to-let mortgage unlawful.
The directive was designed to protect consumers from the mortgage excesses that had brought about the housing crisis in the US and Europe. But is a person who takes out a buy-to-let mortgage on a property with the sole intent of letting out that property operating in a personal or business capacity? Should this type of economic activity fall into the same class as someone who takes out a residential mortgage to finance the home in which they live? These are two fundamentally different transactions. One is personal to the individual, the other is a business transaction. A residential mortgage is based on the applicant’s personal income, whereas a buy-to-let mortgage is based on the income that can be generated by operating the property as a business venture.