New rules will push up your mortgage rate!

The name Basel III might mean nothing to you, but it will have a big effect on your mortgage rate.

One of the lessons learned from the turmoil of the last few years is that it’s always good to have contingency plans. We all try to put money aside in savings just in case something goes wrong – the boiler breaks, or the car’s exhaust falls off for example – so it makes sense for institutions as important to our everyday life as banks to do something similar.

Basel III

Sadly, while such sensible thinking comes naturally to the rest of us, it needs to be a legal requirement before certain elements of the banking sector will do so.

New rules and regulations are being thrashed out, rules on how much capital banks need to keep held aside to cover for emergencies, as well as a myriad of other rules on things like liquidity.

The rules take the name of Basel, the Swiss town, and we are now onto Basel part III. Let's just say that as trilogies go, it's no Godfather.

Here’s the main thing to note. Banks will have to increase their capital reserves to the equivalent of 7% of their risk-bearing assets – the stuff that can go badly wrong – up from 2%. They have to get up to 4.5% by 2015, then the final 2.5% by 2019.

The bankers aren’t happy

Perhaps inevitably, the banks are already having a bit of a moan about all this.

Leading the charge was the British Bankers Association (BBA), the main trade body and lobby group for the banking industry. First up, the BBA argued that these changes need to be implemented as slowly as possible, to ensure that banks aren’t unduly affected by them.

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However, it was the follow up claim that has, perfectly understandably, upset many. The BBA essentially said that as a result of the new liquidity rules, and the costs associated with implementing them, both the price and availability of lending will be hit.

In other words, not only will it become even harder to get a mortgage, but the price we pay for that mortgage will rise still further. That sticks in the craw, personally.

Making excessive profits

I appreciate the banks are commercial enterprises, there to make a profit as well as provide a service. And I have no problem with that set-up. But the idea that they need to ramp up what they charge for mortgages once these new rules come in strikes me as a touch opportunistic.

Particularly as they are already making a nice fat profit on mortgages.

This week, the Bank of England published its latest quarterly bulletin, looking at the current lending environment in the UK. And the Bank of England’s own research remarks on how substantial the ‘mark-up’ is that banks charge on mortgage lending – that’s basically the profit that banks make on each loan.

Now, I know that there has to be some margin involved, and that the margins needed to increase, so that the banks could repaid their capital reserves. And it’s worth noting that, while clearly surprised at just how much of a margin banks are enjoying from their lending activities, the Bank of England stopped short of criticising them.

However, the Government hasn’t been nearly as shy, with Lord Oakeshott, the Lib Dem treasury spokesman describing such mark-ups as “excessive profiteering”. It’s a viewpoint that he is hardly alone in holding.

Acting now

So the banks are already making a few quid on their existing mortgage ranges, but are set to charge even more, and will lend to fewer borrowers once these rules come in, and we still have the spectre of bank base rate increases to come.

The mortgage market is only going to get tougher, so if you plan to buy, there’s a pretty compelling argument for getting a move on. There’s no point leaving it a year or two, only to see that you’ll be shelling out more the privilege, and that’s assuming you manage to jump through sufficient hoops to be accepted.

Unless of course you believe house prices are about to crash.

Decent advice

Whatever your thoughts on that controversial topic, when it comes to mortgages, it is clear is that good mortgage advice has rarely been more important to get than it is right now. Not only is it important to talk through your own attitude to risk, and whether it’s financially sensible for you to fix your mortgage rate or gamble with a tracker, but it’s also vital that you don’t apply to lenders who are likely to turn you down, trampling all over your credit rating in the process.

I’ve put together tables covering some of the best mortgages in the market today, but I know that if I was looking to buy today, rather than do it myself I’d want to make use of a decent mortgage broker who could guide me through the process. If you want some impartial, fee-free mortgage advice, head over to our mortgage centre where our mortgage team are available to answer your questions, large or small, by email, instant messenger or over the phone.

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