The elephant in the election room that none of the major political parties dare talk about is Basel III which, if it comes into force as currently drafted, will have a big impact on lenders’ appetite for high loan-to-value lending, according to one broker.
Speaking to FTAdviser, Ray Boulger, John Charcol’s senior technical manager, pointed out that this is because it will require lenders to hold significantly more capital against higher LTV mortgages, meaning both higher rates and lower appetite.
“The reduction in competition for this sector of the market will also tend to push up rates,” he said.
Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk.
It was agreed upon by the members of the Basel Committee on Banking Supervision in 2011 and scheduled to be introduced from 2013 until 2015, but changes in April 2013 extended implementation until the end of March 2018.
Mr Boulger explained that the coalition government responded to the impact of Basel II with the two Help to Buy schemes, which he said have both in their own right been successful in building new homes.
“However, it is rather ironic and economically illiterate, for the government to introduce these schemes to circumvent the problems in mortgage lending caused by the large increase in capital adequacy for higher LTV mortgages resulting from its efforts to make the banks safer.
“Whether or not it expected increased regulatory capital requirements to have as much impact as it has, their effect is now clear,” he commented.
“What we need, but no party is offering, is a joined up policy to help first-time buyers who need a high LTV mortgage, rather than one set of regulations dissuading banks and building societies from lending and another scheme only necessary because of these rules.”
Mr Boulger argued that either the government believes the current - and soon to be increased - high regulatory capital requirements are necessary to make the banks safe, in which case they should not invent mortgage schemes where they assume the risk, or they think the capital rules they and the central bank have adopted are too stringent, in which case they should relax them.
Yesterday, various mortgage market insiders gave their opinions on this week’s party manifestos, generally welcoming pre-election promises to ramp up home building, but still want more of a focus on the private rented sector and cross-party support for market-boosting initiatives.
John Heron, managing director at specialist lender Paragon Mortgages, agreed that the private rented sector will be in the spotlight post-election, arguing that its growth to meet a changing housing demographic will only be feasible with a strong and functioning buy-to-let market.
“Additional and unnecessary red tape could stifle that growth and put further strain on the wider housing market,” he commented.