A clause in the European capital requirements directive could push up the cost of mortgages in the UK and increase the risk of repossession, according to reports.
The Financial Times reports the draft directive proposes that all European Union loans must be treated as if they are in default when they are in 90 days in arrears, compared to UK rules that give borrowers up to 180 days.
As a result of the definition change the probability that borrowers will default will increase, leading to a rise of between 15 and 20 per cent on banks’ capital charges on UK mortgages.
The charges could force lenders to either reduce lending or charge more to borrowers. The 90-day period would also give UK lenders less time to work with borrowers struggling to repay their mortgage which could tip more borrowers into default.
Rule Financial consultancy head of risk Clive Stanton told the newspaper: “We are looking at a very worrying development. Whole books of business become unviable.”
In its Financial Stability Report in December the Bank of England noted that without the current forbearance strategies adopted by UK lenders, the arrears rate would be nearly 50 per cent higher.
The British Bankers’ Association says the 90-day period is one of their “top concerns”.
It adds: “We believe that the reduction in the maximum number of days at which default occurs is not reflective of the underlying risk fundamentals.”
Speaking to the FT, a spokesman for EU internal markets commissioner Michel Barnier says: “Our objective is to ensure consistency across the EU, and a level playing field for all financial institutions, which is not currently the case.”