Mortgages for homeowners and buy-to-let landlords could become more expensive under new rules being imposed by international regulators, an industry trade body has warned.
The Council of Mortgage Lenders (CML) said the global rules were likely to have “unintended and negative consequences” for buy-to-let borrowers and those borrowing to finance the purchase of their own home.
It warned that the Basel committee on banking supervision – which sets rules to be adopted by national banking regulators – could require lenders to amass bigger capital cushions against home loans. This would push up the cost of borrowing.
The CML said in response to a consultation issued by the Switzerland-based committee: “Proposed changes by international banking regulators to the rules for assessing credit risk do not reflect the real underlying risk of those assets and would result in unduly harsh capital treatment of both prime residential and buy-to-let mortgages.”
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It added: “In current market conditions, mortgage funding is available and attractively prices and UK consumers are enjoying some of the lowest rates ever. But capital requirements that are excessive relative to the risk of the underlying assets are likely to affect the cost and availability of mortgages.”
The CML said that new mortgage regulation in the UK, which contains affordability tests for borrowers, were being overlooked by the regulators in Switzerland.
It also raises questions about whether the new rules would have to be applied to existing lending and not just new loans. There could also be implications for homeowners wanting to increase the value of their existing mortgage because of the way the rules are being drafted.
For instance, a loan worth 81% of the value of a property would require more capital – and be more expensive – than a loan for 79% of the value of a property.
As the CML published its response to the Basel committee, ratings agency Moody’s said that new rules being introduced by the UK government would make the buy-to-let market – and the entire banking sector – safer. In the autumn statement, George Osborne announced a three percentage-point premium on stamp duty on buy-to-let properties and second homes.
Riccardo Rinaldini, an analyst at Moody’s said these change should help to “temper the growth” of the buy-to-let sector. “This should reduce the tail risk of a sharp decline in house prices from a concentrated market sell-off when interest rates eventually rise,” he said.
He added: “We consider buy-to-let mortgages to be inherently riskier than owner-occupied mortgages,” said Rinaldini. “If borrowing costs rise and rental income no longer covers landlords’ interest payments, a broad based sell-off of BTL properties could fuel a fall in house prices, negatively affecting all banks and building societies in the UK.”
Approximately 15% of all outstanding residential loans to individuals are for buy-to-lot properties and the Bank of England has repeatedly said it is watching the buy-to-let mortgage market. In December, the Bank said it was scrutinising the terms under which mortgages are being granted to buy-to-let landlords, for fear they could be more vulnerable than other borrowers to a rise in interest rates. It has also asked for formal powers to rein in the market.
Moody’s said that the current low unemployment and low-interest rate environment had held down arrears for buy-to-let mortgages and would not affect the credit quality of the lenders it rates.
It added: “That said, a loosening of underwriting criteria or attempts to aggressively boost market share in the BTL market are far more likely to put downward pressure on standalone credit assessments, given the increase in the cost of risk that could materialise in an economic downturn.”