Proposed changes to international banking rules for assessing credit risk would be detrimental to residential and buy-to-let mortgages.
According to the Council of Mortgage Lenders (CML) new Basel reforms would see a significant increase in the risk weightings for prime residential and buy-to-let lending.
The proposal from the Basel Committee on Banking Supervision (BCBS) would result in a higher cost of borrowing for first time buyers, home movers, remortgage buyers and buy-to-let landlords.
Lenders would be required to make larger capital provisions in the event of home loan defaults increasing mortgage interest rates and the cost to own your own home.
Uk mortgage rates at their lowest
Borrowers in the UK are benefiting from record low mortgage rates due to the increasing supply of mortgage funding and attractive prices.
The CML believes the Basel reforms are based on a flawed understanding of risk and impose excessive capital requirements on lenders relative to the risk of the underlying assets.
This will increase the cost and availability of borrowing in the UK for prime residential and buy-to-let lending.
Also, they have said the reforms by the BCBS have failed to make allowance for the way the UK has already reinforced mortgage regulation with the Mortgage Market Review (MMR) and stress testing of mortgage affordability.
The proposals also require the original property valuations to be adjusted downwards by the lender but not to reflect any increase.
Failing to use the most reliable market valuation for a property whether they are first time buyers, home movers, remortgage buyers and buy-to-let landlords may distort the amount of capital lenders are required to hold against a loan.
For older equity release mortgage buyers, funders are cautious offering lower loan to values with interest rates of 5.8% upwards without any evidence of earnings which is important for borrowers with only pension income.
Changes to loan-to-value figures
Having to use a lower property valuation would reduce the loan-to-value (LTV) figures for a borrower and could mean they cannot secure an advance, such as a remortgage buyer making home improvements.
Even a small change in the LTV could make a significant difference due to the “slab” structure for risk weightings proposed by the Basel committee rather than a marginal one, distorting the mortgage market.
For example, a loan at an LTV ratio of 81% would attract a risk weighting of 45% applying to the whole sum advanced, while a mortgage with a 79% LTV ratio would have a weighting of 35%.
The CML believes that lenders should be able to apply a blended risk weighting, reflecting real risk across their portfolio of loans and this would be a better measure of risk associated with the loan.
What are your next steps?
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