Time to act over new mortgage lender regulations
Mortgage lenders in the Scottish buy-to-let sector will need to update their lending documentation and servicing processes in preparation for a new regime for private rented housing in Scotland.
The existing types of tenancy for private rented housing in Scotland are due to be replaced later this year with a new form, the private residential tenancy.
Introduced by the Private Housing (Tenancies) (Scotland) Act 2016, this modernised form of tenancy rebalances the rights and responsibilities of landlord and tenants, with enhanced protection for tenants, and will have a notable impact on the buy-to-let sector in Scotland.
The Scottish Government is expected to bring the act into force this December. Once commenced, all new tenancies of private housing in Scotland will have to be created as private residential tenancies.
Greater security of tenure for tenants
One of the most important differences will be the absence of the “no fault” ground for removal – a marked increase in tenant protection. Currently, for short assured tenancies, landlords have the option to remove a tenant at the end of the tenancy.
Under the new legislation landlords will have to satisfy one of 18 grounds for recovering possession in order to bring a private residential tenancy to an end. These include, for example, where the landlord intends to sell or refurbish the property, where the tenant has breached the tenancy agreement or been in rent arrears for three consecutive months, or where a landlord registration or licence is revoked.
Of key importance for mortgage lenders is the eviction ground which allows the recovery of possession where the property is subject to a heritable security (i.e. a legal mortgage) and the mortgage lender requires the tenant to leave the property in order to dispose of it with vacant possession under the lender’s power of sale.
Restrictions on landlords increasing rent
When a landlord wishes to increase the rent payable by the tenant they will have to serve a “rent-increase notice” on the tenant. The new legislation will only allow landlords to serve such a notice once every 12 months and a tenant who does not agree with the increase can refer the matter to a rent officer for determination.
The act will also introduce a mechanism for local authorities to put the brakes on spiralling rents by asking the Scottish Government to designate an area as a “rent pressure zone” for up to five years. During that period landlords in that area will only be able to increase the rent under a private residential tenancy by a set percentage. The relevant percentage for each area will be prescribed by statutory instrument when designating that area as a rent pressure zone, but will not be less than the Consumer Prices Index (CPI) plus 1 per cent.
Impact on borrowing
Landlords whose properties are in areas designated as rent pressure zones will have limited ability to put up rents, in order to counteract increases in their outgoings, including changes in monthly mortgage payments resulting from interest rate movements.
Buy-to-let portfolios with significant exposure to properties in rent pressure zones could experience a decrease in capital value, although the time-limited nature of such designations, combined with the ability of landlords to recover possession and re-let at a higher rent, if one of the 18 eviction grounds is met, will be a mitigating factor.
Updates to product documentation
At present, lenders’ terms and conditions commonly require that borrowers under buy-to-let mortgages enter into tenancies in the form of a “short assured tenancy” if the property is a private house in Scotland. These requirements will need to be updated ahead of the legislation coming into force and, to ensure a smooth transition to the new regime, lenders should consider where updates to their product documentation will be needed, and take steps to implement those changes.