Mortgage lenders may be forced to pull out of buy-to-let lending in Scotland if proposed legislation to cap rents and restrict landlords' right to evict tenants are introduced unamended.
If passed the Scottish government’s Private Tenancies Bill, published in late October, would put an end to short assured tenancies, introduce rent control zones and remove landlords’ rights to repossess on a no-fault basis.
A spokesman from the CML said lenders “continue to have concerns about some of the proposals for a new tenancy in the private sector”.
He said: “One over-arching concern is that well-intentioned proposals will have unintended consequences and discourage landlords from investing in the sector. That could lead to a shortage of property, less choice for tenants and push rents higher.”
He highlighted that there is also still some uncertainty about where rent controls would apply, and how they would operate which he said “will deter landlords”.
He added: “We are also concerned that in setting fixed rents, some landlords may not anticipate all their costs and may therefore have problems in keeping up with their mortgage payments. There is also a risk that uncertainty over costs may lead them to set rents at too high a level, to the detriment of the tenant.”
The lender trade body is calling for the introduction of a system similar to the receiver of rent in England and Wales. In cases where the tenant is paying the rent but the landlord isn’t paying the rent, the tenant can make the payments directly to the lender.
The spokesman added: “That would enable the mortgage commitments to be met, and the tenant would have a better chance of staying in their home.”
Among other things the Bill proposes to replace the short assured tenancy agreement with the private rented tenancy.
This will replace a six-month initial tenancy agreement followed by a monthly rolling contract with a tenancy agreement that has no limit on tenure.
The Bill will also introduce “rent pressure zones” where rents can be capped for a period up to five years if Scottish ministers deem that rents have risen “too much”.
Within rent pressure zones rent reviews for sitting tenants will be subject to caps of CPI + 1 + n where n is determined by ministers.
Grounds for repossession will also be restricted with landlords’ rights to take possession where the tenant has not defaulted on the tenancy agreement scrapped completely.
Landlords and lenders will still be able to take possession of a property on a restricted set of grounds including where the tenant defaults on rent or causes criminal damage to a property.
Ian Andrew, managing director of Nationwide’s group intermediary sales, supported the views laid out by the CML and said: “Nationwide, through its specialist lending arm The Mortgage Works, continues to support measures that provide improved security for tenants in the private rental sector where desired. Our existing lending criteria and established support for longer term standard tenancies reflects this position.
“Any reforms that protect tenants from unfair practice are positive, but we believe that any changes should balance the needs of tenants and flexibility of landlords effectively. The industry, as outlined by the CML, has been clear that it does not believe the Bill so far achieves this.
“Our concern is that the current proposed changes could constrain investment in the private rented sector in Scotland and exacerbate rent inflation through a long term lack of supply. We believe more measured reform is necessary to improve the market, both for tenants and for landlords.”
Charles Haresnape, group managing director for mortgages at Aldermore, said: “In general the Scottish Bill contains sensible measures, especially from a tenant’s perspective.
“Most professional landlords and good quality amateur landlords will welcome the continuation of the same tenant in the property but providing there is no weakening of powers to evict when things have gone wrong.
“The main concern is that when local authorities have greater control over rent increases, they must retain an element of commerciality otherwise they would run the risk of choking off supply in the private rental sector, a gap which local authorities would not be able to close themselves.”
Alan Cleary, managing director of Precise Mortgages, said: “This Bill still has to progress through the Scottish parliament and until we see the final rules it is hard to know how we will react.
“That said, in its current format we find the proposals worrying given the impact it may have on lenders’ appetite to lend, landlords’ appetite to invest and the consequent impact that will have on tenants’ ability to rent.”
Scottish government
However Margaret Burgess, the Scottish minister for housing and welfare, said the Bill would “provide security, stability, and predictability for 700,000 tenants in Scotland while providing appropriate safeguards for landlords, lenders and investors”.
She said: “This landmark housing reform will introduce a modern tenancy to make it a more professionally managed and better regulated sector that provides good quality homes and is attractive to those who want to live, work and invest in it.”
Burgess also dismissed lender concerns and said fears that problems that arose in the British private rented sector following Labour’s introduction of the 1965 Rent Act which introduced regulated tenancies and independently assessed rents that were then consolidated in the 1977 Rent Act were unfounded.
She said: “The provisions in the Bill offer a balanced, fair and proportionate approach to rents.
“Mortgage lenders have nothing to fear from our proposals as there are sufficient safeguards in the bill to protect their interests. Landlords will still be able to charge a rent that is fair and there are robust and comprehensive repossession grounds for regaining possession of a property.
“Landlords and investors can feel confident in planning their investment as the bill sets out the criteria for a rent pressure zone designation, including the minimum cap on rent increases (which will be at least CPI+1% for sitting tenants). Landlords will also be able to recover their reasonable costs for property improvements.”
She confirmed that rent pressure zones will address rent increases for sitting tenants, and will not apply to new tenants.
And she added: “The Scottish government recognises that increasing supply of homes is the sustainable, long-term solution to addressing housing affordability. That is why are working with Homes for Scotland, and other industry partners, to attract new investment into the sector.
“We want to see supply grow to meet demand in areas where rent increases have been limited. But this has to be inclusive, sustainable growth that benefits everyone.”
John Heron, managing director of Paragon Mortgages, said the key question for lenders and landlords was whether they would be able to take vacant possession of a property should circumstances change.
But he added: “On the basis of what we have seen so far in this Bill I don’t think that it will reduce lender appetite to lend in Scotland. That said, it is still not clear how the rent controls will work in detail.”
Katy Dickson, policy officer for business and property at Scottish Land & Estates, said the grounds for repossession “still fail to recognise all the reasonable circumstances in which a landlord may need to ask a tenant to leave”.
Written evidence lobbying Scottish ministers for changes to the Bill must be submitted by 19 November 2015 while the final rules are due to be enshrined by Spring 2016 when the Scottish parliament closes.
