By 21 March 2016, the UK will be required the implement the pan-European Mortgage Credit Directive (MCD), a set of regulatory standards for the protection of mortgage consumers that are expected to be met by all EU member states.
The requirement has proved a little controversial, not least because of the recent regulatory shake-up that took place in early 2014 under the Mortgage Market Review. For its part, the Treasury aims to maintain the existing framework whilst making the minimum adjustments needed to bring it up to EU standard ; but there has nevertheless been some unrest in the buy-to-let market, which is likely to feel the impact in certain areas.
One such area is mortgages for the purchase of mixed-use properties, where the borrower will occupy less than two-fifths of the property and use the rest for commercial purposes. Under current UK law, these mortgages are not considered regulated . The MCD, however, does not make provisions for mixed-use thresholds, and as such would bring such mortgages under the scope of Financial Conduct Authority (FCA) regulation.
Many industry bodies have expressed their concern. In its response to the Treasury Consultation that ran between September and October 2014, the Association of Mortgage Intermediaries (AMI) speculated that, due to the niche nature of this market, many lenders would elect not to operate in it, leaving a small group of borrowers struggling to obtain mortgage finance .
On 25 March 2015, the latest version of the Mortgage Credit Directive Order 2015 was published. But the legislation is still not clear enough.
Article 4 of the 2015 Order states that a buy-to-let mortgage contract cannot relate to a property that “at any time [is] occupied … by the borrower or a related person” , suggesting that a buyer who wishes to occupy any part of their property, however small, will be subject to a regulated sale.
Schedule 1, paragraph 4(21) amends the part of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 that defines a regulated mortgage contract. However, the part which states that “at least 40%” of the property is to be used as a dwelling is left in place .
Perhaps in an effort to bypass the confusion between regulated and unregulated loans, schedule 1, paragraph 4(22) establishes a number of exclusions, including ‘investment property loans’, which apply to properties purchased for business purposes and of which less than 40% is occupied by the borrower . However, the definition is given in addition to that laid out in the 2001 Order, making it self-contradictory, as a property cannot be both “less than” and “at least” 40% owner-occupied.
The new legislation needs to be as unambiguous as possible, no matter how small the area of the market to which it related. In fact, as the AMI observed in its consultation response, the niche nature of this market is precisely why it must be unambiguous – as any confusion, no matter how slight, might lead to it disappearing altogether.
Written by Ben Gosling for Commercial Trust Ltd
 “The Implementation of the EU Mortgage Credit Directive”. HM Treasury. 1 Dec 2014.
 “What is a regulated mortgage contract?” FCA. 1 Apr 2013.
 “Association of Mortgage Intermediaries’ response to HM Treasury’s consultation on the implementation of the EU Mortgage Credit Directive (MCD)”. AMI. Retrieved on 27 Oct 2014.