During a panel discussion at the Paragon Great Buy-to-Let Market Debate, John Heron, managing director at Paragon (pictured), said tougher capital adequacy rules for buy-to-let lending did not stack up against the evidence available.
Last year the Basel Committee published a consultation document proposing that lenders should hold more capital in reserve for buy-to-let borrowing, with these loans being deemed riskier than deals for homeowners.
The consultation paper is still open and if the proposals come into force, a standardised risk weighting for buy-to-let loans could be ramped up from 35% to 91%, and even 120% for loans at 80% loan-to-value (LTV) or higher.
Heron said: “The proposals against the quality of the buy-to-let lending that we see in the UK just seem like nonsense, they’re nuts.
“If we look at the arrears applied to buy to let throughout its history, excepting one relatively small blip caused by one or two errant lenders during the financial crisis, buy-to-let arrears have been half the level that we’ve seen in owner-occupuation. The general credit profile is significantly superior because you’re dealing with mature individuals who require much lower loan-to-values and put more capital in and retain the property long term for an investment.”
David Whittaker, managing director at Mortgages for Business agreed that the performance of buy-to-let loans over time has been superior to that of homeowners.
“It does seem bizarre that the current proposal is to take buy-to-let assets from 35% risk asset weighting up to 91%. If you look at that in isolation that’s an increase of 160% with little, if any evidence, if indeed the opposite for performance,” he added.
“Developer deals are currently 100% risk asset weighted, so you’re saying buy to let is only 9% less risky than a greenfield development site where you don’t know what’s going to happen until you put your first spade in the ground? That has to be the most extraordinary mathematical computation I think we’ve ever heard.”
However, Whittaker added that the biggest concern for the sector at present was the decision to hand the Bank of England’s Financial Policy Committee (FPC) powers to intervene in the market if it deems necessary.
Last year Chancellor George Osborne said the FPC would be granted these powers “as soon as possible”.
Whittaker said: “We’ve already got one foot off the ground as we transition through Stamp Duty changes and tax changes for landlords over the next 18 months. So why would you conceivably, in any business environment, start taking decisions on levers and pulling them without know the outcome of existing levers?
“The market is going to change but if the FPC starts throwing other tools into the mix we won’t know in 18 months’ time whether it was their changes that had an impact, or the changes that are already in hand…I would be very disappointed if they did anything this year or indeed found the need to do it in 2017.”