The Basel Committees second consultative document on Revisions to the Standardised Approach for Credit Risk has been released for discussion. Comments on the proposals closed 11 March 2016. There are a number of significant changes to residential property risk calculations 

These guidelines will eventually become part of Basel IV and will apply to banks after they are no longer using their internal assessments - which are being reviewed and regulated separately under Basel III.

First, risk will be assessed by loan to value ratios, with higher LVR’s having higher risk weights.     

Second, investment property will have a separate and higher set of LVR related risk-weights.                

Third, debt servicing ratios will not directly be used for risk weights.

This continues the divergence between the relative risks of investment and owner occupied lending, the former demanding more bank capital, thus increasing the selective pricing of investment loans.

Currently there is no differentiation between residential investment and residential owner-occupied.

The current risk weighting for both residential components is 35%. This will not be the reality under Basel IV. 

Property development finance has a risk weight of 150%. 

All other Bank loans with real estate exposure: 

• which are finished properties
• covered by a legal mortgage
• with a valid claim over the property in case     of default
• where the borrower has proven ability to repay     – including defined DSR’s
• with a prudent valuation - and in a falling     market a revised valuation - to derive a valid LVR
• all documentation held

If each of these criteria are met the following risk weights are to be applied:

Bank Loan Exposure

LVR  Sub 40%

LVR  40%-60%

LVR  60%-80%

LVR  80%-90%

LVR  90%-100%

Residential Owner Occupier

25%

30%

35%

40%

45%

Residential Investor

70%

70%

90%

120%

120%

Commercial Investor

80%

80%

100%

130%

130%

Property Developer

150%

150%

150%

150%

150%

Basel IV is coming for developers and investors with its strict definitions for the global banking system.          

The definition for residential and commercial property investment lending under Basel IV is when:                     

“Mortgage Repayment is Materially Dependent on Cashflows Generated by Security Property”.