Proposed changes may have affect on cost of mortgages
Mortgages, specifically buy-to-let, may become more expensive under suggested changes put forward by the Basel Committee on Banking Supervision (BCBS), the Council of Mortgage Lenders (CML) has warned.
The role of the BCBS is to create rules that are then implemented by national banking regulators, and their latest proposals are that lenders may be required to set aside more money to cover themselves more comprehensively.
Naturally, to cover the cost of setting aside more money, they may increase their own costs and the price of borrowing could increase, with the current historically low rates possibly rising as a result.
Whether these proposed changes are to affect existing lending as well as new loans is yet to be decided, but it could also affect those home-owners who are looking to remortgage or increase the value of their property.
Does everyone agree with the proposals?
The CML believes that the changes seem to be out of touch with the actual risk involved. The BCBS have put forward that a buy-to-let mortgage between 60-80% loan-to-value would have a risk of 90%, 2.5 times more risky than residential loans of the same value.
So why have they done it?
The changes come in the wake of the upcoming Mortgage Credit Directive (MCD) which will also see consumer buy-to-let mortgages (those who ‘accidentally’ become landlords through not being able to sell their property or inheriting one), becoming regulated.
Buy-to-Let mortgages are seen as riskier than residential mortgages because of the landlord’s reliance on rental income.
If rates were to rise and the landlord’s rental income doesn’t cover their mortgage payments, many buy-to-let properties may be sold off. This sudden increase in housing availability could then lead to a decline in house prices.