How does BASEL lll affect Buy-to-let Investors
BASEL lll is a deal between all of the world’s banks...
that they will triple the amount of the highest quality capital reserves (cash is one example) which they hold in order to protect themselves against losses. The new rules start to be phased in from January 2013 and will mean most banks need to hold substantially more capital than they do currently.
The good news is that banks are less likely to run into difficulty, collapse and trigger the “domino effect” failure of other banks to threaten the whole banking system. Other good news is that as private citizens we are less likely, in future, to have our taxes used to bail out banks who have made poor commercial judgements. But the bad news as business people and investors wanting to borrow money is that banks will probably further tighten their lending criteria in the future; reducing the supply of new money and increasing the margins they charge. From a mortgage perspective – low risk means low Loan To Value. Banks will cautiously value assets and want to see investors putting more of their own cash into the deal.
The other trend is that the inter-bank lending rates (“LIBOR” which effect how much it costs banks to buy funds in the money markets and consequently how much they charge for loans and mortgages) used to be closely connected to the Bank of England Base rate. However, with Base rate staying at an unprecedented low level the banks have “disconnected” from Base rate and other forces are now setting LIBOR. This means that Government monetary policy and Bank of England Base rate decisions may be much less influential in the future than they were in the past.
So what should investors do?
Fix if at all possible, and fix for as long as possible is Martin & Co’s advice. Even if a fixed rate seems more expensive, the certainty which it brings you in a turbulent and uncertain financial world is worth paying a premium for.
The graph below vividly illustrates these trends – Base rate has gone low and stayed low, LIBOR has now disconnected from Base rate and inflation has shot up. Inflation means that a pound tomorrow is worth less than a pound today, so if inflation is occurring and you have fixed your mortgage or loan repayments then all of your future payments will become more and more affordable.