Intended changes: capital treatment of residential mortgage loans
Intended changes to BS2A/B in respect of
residential mortgage loans
Changes to the definition of residential mortgage loan in BS2A/B
Definition of residential mortgage loan: section 4.7 of BS2B and section 43(e) of BS2A.
“Residential mortgage loan” means a loan secured by a first ranking mortgage over a residential
property used primarily for residential purposes either by the mortgagor, or a related party of the
mortgagor, or a tenant of the mortgagor. A loan may not be classified as a residential mortgage loan
if the mortgaged property is predominately used for farming or commercial activities. Without
limitation, a property will be considered to be predominately used for farming or commercial activity
if:
(i) the mortgaged property would be marketed as a farm or a commercial property; or
(ii) the principal or interest payments are predominantly serviced from the income generated
by the use of the property for farming or commercial activity, except where that income is
rental income and the property is used for a residential purpose.
For the purpose of this section, predominantly means more than 50 percent.
From 1 July 2016, a residential mortgage loan must be classified as either a standard residential
mortgage loan or a reverse residential mortgage loan. Prior to 1 July 2016, all residential mortgage
loans are standard residential mortgage loans. The diagram below depicts the sub-classification of
residential mortgage loans.
Residential mortgage loans (RML)
Standard RML
Non property-investment RML
Reverse RML
Property-investment RML
A standard residential mortgage loan written on or after 1 November 2015, and from 1 November
2016 a standard residential mortgage loan written before 1 November 2015, must be further subclassified into either a non property-investment residential mortgage loan or a property-investment
residential mortgage loan.
All residential mortgage loans written before 1 November 2015 are classified as non propertyinvestment residential mortgage loans until 31 October 2016.
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A non property-investment residential mortgage loan is eligible for retail treatment irrespective of
exposure size.
A reverse residential mortgage loan may only be recognised in the residential mortgage loan
category up to the value of the residential property used as security for the loan. Any excess of the
loan over the property value is deducted from Tier 1 capital under section (7.3(o)/2.9(p)).
The following definitions apply in respect of residential mortgage loans:
“non property-investment residential mortgage loan” means a standard residential mortgage loan
secured over only owner-occupied residential property.
“owner-occupied residential property” means a property that meets the following criteria:
(i)
a natural person or related party of a natural person owns the property and one or other of
these parties is the obligor under the residential mortgage loan;
(ii) that natural person, or a related party of that natural person who falls within limb (c) of the
definition of related party in this section, intends to occupy the property either as their
principal or secondary residence (a secondary residence includes holiday homes or a second
home where the natural person or related party spends significant time); and
(iii) in respect of a secondary residence, no rental income is derived from that property, except
to the extent that the rental income is minimal (e.g. a bach rented out for six weeks a year).
“property-investment residential mortgage loan” means a standard residential mortgage loan that is
not a non property-investment residential mortgage loan.
“related party” for the purposes of section [4.7/43] means a person (A) that is related to another
person (B) in one of the following ways:
(a) A is the trustee of a trust and B is a beneficiary of the trust;
(b) A is a company or unincorporated entity and B is a shareholder of, or otherwise
controls, A;
(c) A is the spouse, civil union or de facto partner of B; or
(d) A is the estate of the spouse, civil union or de facto partner of B.
“reverse residential mortgage loan” means a residential mortgage loan for which payments of
principal or interest are not due in accordance with an agreed repayment schedule but rather on the
occurrence of a specified trigger event, in which case the repayment of the loan is made from the
proceeds of sale of the property.
“standard residential mortgage loan” means a residential mortgage loan that is not a reverse
residential mortgage loan.
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Changes to definitions relevant to residential mortgage loans
Section 4.150A of BS2B (equivalent changes will be made to 37 and 43 of BS2A)
Changes are indicated with tracked change format.
The loan-to-valuation ratio (LVR) for a residential mortgage loan is calculated by the formula:
LVR = loan value/property value x 100
In the formula –
“loan value” is the total amount of:
(i)
(ii)
Deleted: , as at balance date,
All claims secured by way of first ranking mortgage over residential property;
The EAD amount of any off balance sheet exposures secured by way of first ranking
mortgage over residential property and consistent with sections 4.155 to 4.158.
Deleted: the
Deleted: the
Lending facilities that are not tied to nor managed as part of the residential mortgage loan and that
are not normally treated as secured over the residential property, such as credit cards or personal
loans, do not need to be included in the LVR calculation.
“property value” –
(i)
(ii)
for a standard residential mortgage loan or a reverse residential mortgage loan at the
time of origination, is the total value of the residential property that is security for the
residential mortgage loan determined under a bank’s residential property valuation
policy when a residential mortgage loan is originated and,
for a reverse residential mortgage loan, must be updated every three years, and at that
time is given by the formula:
property value = {
{
Max (Vo , 80% x VR)
VR
if VR > Vo or
if VR ≤ Vo
Deleted: ¶
where Vo is the total value of the residential property that is security for the residential mortgage
loan determined under a bank’s residential property valuation policy at the time the loan is
originated, and VR is the total value determined at the most recent three-yearly update determined
under the bank’s residential property valuation policy.
“residential property valuation policy” means .. [retain existing text and add at the end]: for reverse
residential mortgage loans requires that the property value is updated three-yearly.
Deleted: On and after 1 October 2014,
Delete from BS2A: …
Deleted: on a before 30 September 2014
means a policy governing how a property
value is determined for a residential
mortgage loan that
“independent valuer” means a person who is not associated with a person who has an interest in the
residential property for which a valuation is made and who is:
(i)
a registered valuer as defined in the Valuers Act 1948;
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(ii)
(iii)
another person approved to provide valuation services by rules made under the Ratings
Valuation Act 1998, or
a person who meets the definition of valuer under the laws of another country, provided
that the Reserve Bank has confirmed in writing to the registered bank that it considers
the law of the other country to be at least as satisfactory as the requirements under the
Valuers Act 1948.
No change to definition of professional valuation service.
Calibration
The following calibrations will apply in BS2B.
4.164A For the purpose of section 4.164 Correlation (R) is determined by the loan-to-value (LVR) of
the residential mortgage loan in accordance with Table 4.11A.
Deleted: , on or after 30 September
2013,
Table 4.11A
Correlation for residential mortgage loans
LVR
Correlation (R)
Correlation (R)
Non property-investment Property-investment
residential mortgage loan residential mortgage loan
90% and over
80-89%
Under 80%
.21
.20
.15
.24
.23
.17
Delete unnecessary sections: 4.164B/4.164C
Table 4.11
Minimum LGD for residential mortgage loans
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LVR
LGD
LGD
Non property-investment Property-investment
residential mortgage loan residential mortgage loan
90% and over
80-89%
70 – 79%
60 -69%
Under 60%
38%
33.25%
28.5%
19%
10%
40%
35.5%
31%
21.5%
12.5%
Deleted: - 100%
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4.61 to the extent that exposures are secured by residential real estate the LGDs corresponding to
different LVRs set out in table 4.11 (column 3) must be used unless the bank has the consent of the
Reserve Bank to use its own LGD estimates.
The following calibrations will apply in BS2A and the final column applies for reverse
mortgages in BS2B
The following risk weights are intended to apply to standard and reverse residential mortgage loans
under BS2A and to reverse mortgages under BS2B (that is a standardised approach will apply to this
asset class in BS2B).
Table 4.xx: Risk weights for residential mortgage loans that are not 90 days past due
Risk weight in %
Risk weight for reverse residential
mortgage loan (%)
If there is lender’s
mortgage insurance that
qualifies under section 38
If there is no lender’s
mortgage insurance or
lender’s mortgage
insurance that does not
qualify under section 38
Non
propertyinvestment
residential
mortgage
loans
Propertyinvestment
residential
mortgage
loans
Non
propertyinvestment
residential
mortgage
loans
Propertyinvestment
residential
mortgage
loans
Does not
exceed 80
%
40
35
40
LVR Does not
exceed 60%
50
35
81 to 90
%
35
50
50
70
LVR > 60% and <
80%
80
91 to
100%
50
75
75
90
LVR > 80%
100
Loan-tovalue
ratio
Exceeds
100%
100
Deductions from Tier 1 capital
7(3)(o)/2.9(p) the amount to which the loan value of a reverse residential mortgage loan exceeds the
value of the security for the loan that is residential property.
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