U.K. Mortgage Seekers Exploit Loophole to Avoid Credit Check

Rules requiring U.K. homebuyers to prove they can afford their mortgages after interest rates rise have prompted a jump in fraudulent home-loan applications, property appraiser e.surv said.

The unit of LSL Property Services Plc said borrowers have been trying to exploit a loophole that exempts buy-to-let mortgages from affordability checks that regulators introduced to prevent a repeat of the credit crunch. The rules, part of the London-based Financial Conduct Authority’s Mortgage Market Review, took effect in April. A month later home prices surpassed their 2007 peak, according to Nationwide Building Society.

“There has been an uplift in people seeking buy-to-let mortgages that are not regulated by the Mortgage Market Review, which is foolish,” Richard Sexton, an e.surv director, said by phone. “People who can’t afford a standard residential mortgage are applying for a buy-to-let mortgage because you can get around the affordability checks, which is mortgage fraud.”

The new regulations restrict interest-only mortgages and self-certified borrowings and ban banks from relying on rising home prices to balance the risks of borrowers becoming unable to repay their loans. The rules aim to rein in the type of loose lending practices that helped spark the 2008 financial crisis, which saw the collapse of mortgage lender Northern Rock Plc and left Royal Bank of Scotland Plc needing a 45.5 billion-pound government bailout.


“Lenders who are currently offering buy-to-let products need to be alert to the potential of borrowers or brokers attempting to get around MMR rules and have systems and controls in place to prevent this,” the FCA said in a statement. “It is one of the areas we will be looking at when we undertake our post-implementation review.”

E.surv is the U.K.’s largest provider of residential-property valuations. The Kettering-based company inspects about 400,000 properties on behalf of lenders each year.

Total U.K. mortgage approvals fell in May after the checks were introduced, dropping to the lowest in 11 months, the Bank of England said on June 30. The number of buy-to-let loans climbed 43 percent in April compared with a year earlier, according to the Council of Mortgage Lenders, a home-loan industry advocacy group.

Stress Test

The Bank of England’s Financial Policy Committee said last week it will limit the proportion of mortgages advanced by lenders at 4.5 times income to no more than 15 percent of new lending. The panel also said banks must decline loans to borrowers who fail a stress test that assumes an immediate 3 percentage-point increase in the central bank’s benchmark interest rate.

The measures won’t stem price gains in the short term, Nationwide said today. Home values rose 1 percent in June from the previous month to an average of 188,903 pounds ($323,900), the lender said. That was the 14th straight increase.

In London, prices climbed almost 26 percent during the second quarter from a year earlier, fueled by cash-rich buyers and foreign investors.

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