Lenders fear that buy-to-let could increasingly be used to replace the self-certified sector as borrowers seek to avoid the stricter affordability rules of the Mortgage Market Review.
Under the MMR, which comes into effect on 26 April, lenders are obliged to ensure the borrower can afford their mortgage and must obtain proof of income in all cases, which means that self-cert loans have been banned, although lenders have not offered them for some time.
Residential borrowers will also be subject to a stress test to ensure they can afford their loan if rates rise, so it is likely to be harder to obtain a loan in most cases post-MMR.
Lenders fear that more borrowers will be tempted to “game” buy-to-let – which is unregulated and therefore not subject to the same affordability and income rules as residential mortgages – for what should be a residential mortgage to avoid these stricter affordability rules.
Precise Mortgages managing director Alan Cleary believes the gaming of buy-to-let could become a “massive” problem for lenders.
He says: “The reason people game buy-to-let is because they can’t pass the affordability requirements for regulated mortgage contracts. MMR makes that affordability requirement even tougher so I think more people will attempt this.
“It is a market-wide issue but we’re [Precise] on top of it. We don’t want people who are gaming coming to us but we have the systems to hunt these things out. But I’m expecting the number of people attempting this to increase a lot. It could be a massive problem for the industry.”
CHL Mortgages managing director Bob Young believes buy-to-let could become the next self-cert as borrowers seek to game
Self-certification loans became known as “liar loans” because borrowers did not have to provide evidence of their income, meaning they could inflate their earnings on the application form.
Young says: “If you go back to 2001-03, I was saying self-cert for the employed is an invitation to defraud; it is ridiculous. I got smacked down for that but I thought it was an absolute disaster and we ended up with liar loans.
“I fear that if we are not careful [about ensuring buy-to-let is not used for residential applications], this could turn out the same.”
In June 2011, former regulator the Financial Services Authority urged buy-to-let lenders to ensure their systems and controls could not be “gamed” by intermediaries “still looking for self-certification mortgages”.
However, while some lenders are worried about an increase in the gaming of buy-to-let, Mortgages for Business managing director David Whittaker, a buy-to-let specialist broker, believes the checks are in place to weed out this practice.
He says: “I think the checks and balances are probably in place as lenders got quite careful about this 18 months ago.”