Industry experts have voiced concerns over the Basel Committee’s proposals to apply higher capital requirements against buy to let loans, dismissing the proposals as ‘nonsense’, unfounded and not relevant to the UK.
The recent panel discussion at the Paragon Great Buy to Let Market Debate saw industry experts argue against the Basel Committee’s proposals, with John Heron, managing director at Paragon saying tougher adequacy rules for buy to let lending did not stack up against the evidence available.
The Basel Committee’s consultation document, which was published in December 2015, proposes that lenders should hold more capital in reserve for buy to let borrowing, and works on the assumption that buy to let mortgages present greater risk than homeowner mortgages.
The consultation paper is open until the 11 March.
If the proposals do come into force, a standardised risk weighting for buy to let loans could be increased from 35% to 91%, and as high as 120% for mortgages at 80% loan to value (LTV) or higher.
“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-occupation. 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.”
Heron was backed up by David Whittaker, managing director at Mortgages for Business, who 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,”
“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.”
Additionally, Whittaker said that in his opinion the greatest worry for the sector currently is that the Bank of England’s Financial Policy Committee (FPC) may be given the powers to intervene in the buy to let market if it sees fit.
During a Treasury Select Committee last Autumn, Chancellor George Osborne said that the FPC would be granted these powers ‘as soon as possible’.
“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.”