New rules could push up cost of borrowing

The Council of Mortgage Lenders (CML) has warned that new rules being imposed by international regulators could result in mortgages becoming more expensive for homeowners and buy-to-let landlords.

The CML said that the global rules could and are likely to have ‘unintended and negative consequences’ for buy-to-let borrowers and those borrowing to finance the purchase of their own home. One major concern is 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, the end result being the cost of borrowing rising.

The CML responded to a consultation issued by the 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.” It also added: “In current market conditions, mortgage funding is available and attractively priced 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.”

Additionally, the CML remarked that the new mortgage regulation in the UK, which contains affordability tests for borrowers, were being overlooked by the regulators in Switzerland.

Another factor is that the new rules could apply to existing lending and not just new loans. For instance, there could be implications for homeowners who want to increase the value of their existing mortgage due to the way the rules are being drafted. If you were to look at two examples; a loan worth 81% of the value of a property would require more capital and thus be more expensive than a loan for 79% of the value of a property.

Ratings agency Moody’s has remarked that the new rules being introduced by the UK government would make the buy-to-let market and the entire banking sector safer. Riccardo Rinaldini, an analyst at Moody’s spoke about the impending 3% stamp duty surcharge, stating that it 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 added: “We consider buy-to-let mortgages to be inherently riskier than owner-occupied mortgages,” and “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.”

Around 15% of all outstanding residential loans to individuals are for buy-to-let properties. The Bank of England has repeatedly stated that it is closely monitoring the buy-to-let mortgage market and in December, the Bank said it was scrutinising the terms under which mortgages are being granted to buy-to-let landlords. As it fears they could be more vulnerable to a rise in interest rates compared to other borrowers. Additionally, it has also asked for formal powers in order to rein in the market.

If you have any queries about how these changes could affect you, please don’t hesitate to contact Orchard & Shipman today. As a company with over 25 years’ experience dealing with private landlords, our team of experts understand the impact a change in government policy can have. We’re readily available to guide and advise you through these sometimes confusing changes in legislation.