Self-build lending under threat over ‘commercial’ mortgage tag – Ipswich

Paul Winter (pictured), chief executive of the Ipswich Building Society, said the Prudential Regulation Authority’s (PRA) interpretation of rules laid out in the Capital Requirement Directive (CRD) could make it more difficult for lenders to support the self-build market.

Last year the Prudential Regulation Authority (PRA) issued its interpretation of the directive’s rules in an attempt to provide clarity for lenders on the level of reserve capital needed for each type of lending. The PRA’s view was that under the CRD, until the property had reached a stage where it could be lived in, it should have a much higher capital weighting to match commercial lending.

Winter said: “Before the PRA provided this ‘clarity’ lenders were using the same weightings they would for residential mortgages, which are much lower.”

The current residential capital weightings are 35% of 8% of the loan advanced to be held in reserve. For commercial lending, this is 100% of 8% of the loan advanced.

“If we have do have to use the 100% weighting during the period of the build, which in our experience can be up to two years, then we are faced with a set of tough decisions to make,” said Winter. “We either do less self-build lending or if we continue at our current lending levels we will have less capital available for other types of mortgages.” Winter said there was also the risk that the cost would get passed on to the customer as rates on self-build went up to compensate for the additional capital requirements.

He added: “Given the government’s policy of trying to encourage self-building in its many forms it seems odd that the regulator may inadvertently be reducing lenders’ capacity to support it.”

The Building Societies Authority (BSA) has challenged the PRA’s interpretation directly with the European Banking Authority and until a response is issued, the PRA has agreed to let lenders conduct business as usual.

A spokesperson for the BSA said: “The PRA has over-interpreted the regulations but they have agreed they will await the outcome of the response before enforcing any changes.” The BSA said that there were approximately 25 lenders in the market providing self-build loans, of which around 23 were building societies.

In a Budget announcement earlier this month, the government said it was keen to pursue more proportionate capital requirements for small banks and building societies, which are set by Europe.