Last updated: 18 November 2016
At a glance
- The Mortgage Credit Directive (MCD) is European legislation designed to foster a single European market for mortgages and to protect consumers. The European Commission published the final MCD text in February 2014.
- The MCD influences both the residential mortgage lending market and lending for buy-to-let (BTL) mortgages in the UK. This page covers only BTL.
- The MCD requires EU member states to develop a ‘national framework’ for BTL lending if they choose to exercise discretion afforded by the MCD to not apply the MCD to their BTL mortgage markets.
- The UK is exercising this discretion and has created a 'national framework' for BTL lending to 'consumers' called 'Consumer buy-to-let' (CBTL).
We are pleased that HM Treasury chose not to apply the MCD to BTL mortgages in the UK, but instead created a national framework for CBTL.
On the basis that the MCD applies to consumer lending, HM Treasury designed the legislation for the ‘national framework’ so that it only applies to consumers who are taking out BTL loans. We welcome this decision, as it minimises disruption to the current functioning of the BTL mortgage market.
As there are no rules proposed to tighten lending criteria, we do not believe that BTL mortgages will become less available to some borrowers following implementation of the legislation.
Why this is important for lenders
The creation of CBTL means that there will be three possible approaches to how the FCA regulates BTL loans, depending on mortgage applicant's circumstances:
- Regulated under Mortgage Conduct of Business Rules (MCOB) in the same way as residential mortgages;
- Regulated under the Mortgage Credit Directive Order (MCDO) as CBTL
- Unregulated if the primary purpose of the mortgage is for business purposes.
The CML expects most BTL mortgages will fall into category 3.
This is because most BTL mortgages are primarily for business use; the borrower (the landlord) is letting their property to a tenant for commercial gain. Most BTL mortgages preclude occupation of the property by the borrower. Because of this, the vast majority of BTL mortgages will continue to be advanced outside of the FCA’s jurisdiction.