Under Basel Committee rules, banks have to apply a 35pc risk weighting to residential mortgage loans with a loan-to-value ratio of between 60pc and 85pc. That measure defines how much capital a bank has to hold against the loan to make sure it can deal with a downturn in the economy when more loans migh not be paid back. But the new plan would mean doubling that weighting to 70pc if the loan is dependent on rental income. This would, in turn, double the capital that would have to be held against the loan. Such a change would drive up the cost of lending and reduce the supply of buy-to-let mortgages for buyers. This standard model applies to all banks except the very largest, which are allowed to use their own risk weightings if they have enough data to satisfy regulators that they understand the market fully. However, the wider tightening up on buy-to-let does still affect those giant lenders. Banks that specialise in the sector argue that they take prudent risks and should not be hit with yet another round of charges. But the Financial Policy Committee at the Bank of England, headed by Mark Carney, yesterday warned that buy-to-let mortgages are twice as likely to turn bad as loans taken out by owner-occupiers. The FPC has asked the Treasury for powers to limit lending to landlords, which could include restrictions on loan-to-value and loan-to-income ratios. The Basel Committee’s tougher rules will also apply to businesses as “commercial real estate lending is a recurring source of troubled assets in the banking industry,” the proposal document said. “When the repayment of the loan depends on the cash flows from lease or rental payments of the commercial property… such loans are riskier and the prospects for repayment, and for recovery in the event of a default, depend on the property rather than on the borrower.”
Global officials at the Basel Committee, which sets global financial standards, plan to crack down on buy-to-let loans amid fears of instability following a boom in the market. The Committee wants to hold twice as much capital against mortgages when the repayments are dependent on income from tenants. This move comes after Chancellor George Osborne introduced a new tax on landlords. Basel Committee rules state that banks have to apply a 35% risk weight to residential mortgage loans with a loan-to-value ratio of between 60% and 85%. The new plan would double that weighting to 70% if the loan is dependent on rental income.