A source who received the letter told Mortgage Solutions that Bailey has sent a clear message that the Basel proposals were not ‘a done deal’.
The consultation document sets out different levels of capital requirements to be held in reserve for residential mortgages and buy to let, depending on loan-to-value (LTV). These are intended to fund any losses which may arise from the loans. Currently residential and buy to let are set at the same level.
But the letter, sent to many banking institutions, said: “…we do not expect forthcoming adjustments to risk-weighted assets at Basel to add to system-wide capital requirements.”
If approved, buy-to-let lenders, specifically smaller banks and building societies, will be forced to hold more capital in reserve for mortgages advanced to landlords which could act as further restrictive measure on the buy-to-let market.
Mark Carney has already asked for the power to intervene in the buy-to-let sector to control lenders’ underwriting criteria alongside the Chancellor’s announcement that purchasers of buy-to-let property and second homes will face a 3% Stamp Duty premium.
Smaller lenders will be particularly concerned by the proposals because the Basel Committee is targeting the Standardised Basel Approach which is the capital requirement levels which challenger banks and smaller societies must adhere to. The UK’s largest lenders are trusted to set their own capital requirement levels because they are seen to have more data to rely on.
To illustrate the effect: currently a risk weighting of 35% is used for both residential and buy-to-let loans. Lenders are required to reserve 8% of the 35% risk weighting, for example, a £100,000 mortgage has a risk weight of 35%, £35,000, and banks must hold 8% of this loan in reserve, £2,800.
The Basel Committee has laid out a number of different risk weightings for residential and buy-to-let loans within LTV ranges. One such range, 60% LTV up to and at 80% LTV, has a weighting of 35% for residential loans and 90% for loans where repayment is materially dependent on cash flows generated by property, which experts are interpreting as buy to let.
If the consultation proposals announced last week were accepted, and the 8% rule for lenders remained applicable, for a mortgage of £100,000 at 80% LTV lenders would have to hold in reserve for residential loans £2,800 (£100,000 x 35% = £35,000 x 8% = £2,800) and buy-to-let loans £7,200 (£100,000 x 90% = £90,000 x 8% = £7,200).
The letter looked to reassure those lenders which would be affected by stating the requirements were ‘indicative proposals not final standards’ and were ‘part of a wider package of Basel reforms’.
Challenger banks had been asked to attend a meeting with the Treasury today to discuss the proposals.
The consultation period ends 11 March with any changes to the capital requirements not expected to be enforced until 2019.