The Intermediary – September 2026 - Flipbook - Page 76
S E C O N D C H A RG E
Opinion
There’s an elephant
in the room
named Basel
B
e honest. How many
of you saw the word
‘Basel’ at the top of this
page and immediately
thought about
turning it over? I don’t
blame you. Capital adequacy rules
aren’t exactly the stuff of gripping
blockbusters, but stick with me,
because something is coming next
year which could have a significant
impact on the second charge market.
At the moment, hardly anyone seems
to be talking about it.
What is Basel 3.1?
At its simplest, Basel 3.1 changes the
way banks assess the risk aached
to different types of lending and
therefore how much capital they need
to hold against it.
The new rules are intended to make
capital requirements more sensitive
to the actual risk of the lending.
Depending on which market you’re
operating in, that can be good news,
fairly neutral news or perhaps rather
uncomfortable news.
There are potential benefits for
some buy-to-let (BTL) and bridging
lending. For mainstream residential
first charges, the overall impact is
likely to be relatively neutral. Second
charges are where it gets interesting.
Under the new rules, qualifying
residential mortgage lending is
effectively split according to loan-tovalue (LTV). The lowest-risk portion
of an exposure can aract a 20% risk
weighting, but lending outside that
portion can aract a considerably
higher weighting.
For a first charge lender, that isn’t
necessarily particularly dramatic.
For a second charge lender, however,
there’s an obvious complication:
another lender got there first. The
existing first mortgage effectively uses
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The Intermediary | September 2026
up some, and quite possibly all, of
that lowest-risk slice before the second
charge is taken into account.
Consequently, a much greater
proportion of a higher-LTV second
charge can end up aracting a 75%
risk weighting.
Why care?
Well, because capital isn’t free. If
a lender suddenly has to allocate
considerably more capital to write the
same loan, the economics of that loan
change and the bank has a decision to
make. It could absorb that reduction
in return-on-investment, increase the
price to the customer, lend at lower
LTVs, reduce the amount it lends
in that market, or deploy its capital
somewhere else completely.
This isn’t necessarily just an issue
for banks writing second charges
directly. Many non-bank lenders rely
on warehouse funding provided by
banks. If the economics of providing
that funding change, it is reasonable to
expect some of that additional cost to
find its way through the system.
That’s particularly interesting given
what’s been happening in seconds
of late. The market has enjoyed
considerable growth, with monthly
new business now regularly exceeding
£200m, according to the Finance &
Leasing Association (FLA).
Much of the recent growth has
been driven by larger loans, debt
consolidation and lending at higher
LTVs. In other words, some of the
strongest growth has been taking place
in precisely the part of the market
which may become less aractive from
a capital perspective.
Any good news?
Maybe a lile. Lower LTV second
charge lending can actually benefit
from Basel 3.1.
BUSTER TOLFREE
is managing director –
mortgages, BTL and
bridging at United Trust Bank
Where borrowers have substantial
equity, the new treatment can produce
a lower risk weighting than today. It’s
fair to say, however, that few of us see
a lot of this type of seconds borrower.
Don’t get me wrong. This isn’t a
prediction of doom for second charges.
Far from it. Seconds remain a hugely
valuable product which can provide
customers with solutions that a
remortgage or unsecured borrowing
simply can’t replicate. But I do think
2027 could bring a reshaping of
the market.
We may see lenders competing
harder for lower-LTV business. We
could see some repricing further up
the LTV curve. Some lenders may
accept lower returns, others may
change their appetite, and different
funding models may produce
different outcomes.
We might also see more customers
considering a full remortgage where
previously a second charge may have
been a more obvious, and dare I say it,
beer solution.
The truth is that nobody knows
exactly how the market will respond.
But what we do know is that the rules
change on 1st January, and lenders are
already planning for that.
A few years ago, hardly anybody
outside a dealing room talked about
swap rates. Then, Liz Truss had a
mini-Budget and suddenly everyone
was talking about them.
I’m not suggesting you spend
Christmas reading the Basel 3.1
rulebook. Life is too short! But expect
to hear a few more conversations
about Basel the elephant in 2027. ●
