Thus far, the UK’s mortgage industry is having a bumpy 2025. In early April, the Financial Times revealed that borrowers who took out mortgages during the pandemic were in for a payment shock as interest rates rose from 1.7% to 4.39%. Less than a week later, a new BBC report proclaimed the opposite, noting that UK lenders began cutting back mortgage rates to below 4%.
This is largely a result of President Trump’s sweeping tariffs. Since April 5, the US imposed 10% tariffs on all British imports. Though the UK got off lightly compared to other countries with that baseline 10%—and Trump even paused tariffs a few days after its initial imposition, causing markets to briefly soar after a decline—it seems the move has already made the local economy vulnerable to instability, with senior personal finance analyst Myron Jobson adding that this policy has the potential to slow its overall growth. That’s apparent in the UK’s fluctuating mortgage rates.
The new tariffs have particularly impacted the UK’s ability to implement Basel 3.1, which is part of a larger framework of international banking regulations meant to provide financial stability. Here’s more about it and how it can impact mortgages in the UK as major local and international market developments exacerbate market volatility.
Defining Basel 3.1
The Basel framework, which takes its name from the Swiss city in which it was drafted, aims to strengthen global financial stability by imposing regulations that change how banks manage risk. One of its latest series of reforms, dubbed Basel III internationally and Basel 3.1 in the UK, was specifically introduced following the 2007-08 financial crisis. Because they were written with the goal of preventing future recessions similarly caused by burst housing bubbles, Basel 3.1 has particularly large implications for real estate.
Its reforms essentially provide certain standards that financial institutions can use to calculate risk-weighted assets, including mortgages. These standards can help lenders more accurately generate risk-based capital ratios, which will tell them if they have the capital needed to absorb the potential losses that mortgages pose. Since all banks and investment firms regulated by the Prudential Regulation Authority (PRA)—as well as any financial holding companies incorporated in the UK—will eventually follow Basel 3.1, these reforms will have wide-ranging impacts on the country’s mortgage industry.
Updated Basel 3.1 rules for mortgage lending
In September 2024, a PRA near-final policy statement further helped clarify how Basel 3.1 would be implemented in the UK. These covered a number of stipulations related to mortgage lending, including defining which assets could be classified as ‘residential real estate’ and determining the frequency with which lenders should ideally update valuations on residential and commercial properties. Below are some of the PRA’s more notable recommendations.
Finished VS unfinished properties
To begin with, the PRA proposed that loans should only be assessed as having regulatory real estate exposure—which refers to how much risk a loan poses to a financial institution—if they involve finished properties. In contrast, it recommended that unfinished properties should be classified as ‘other real estate’ and be given a higher risk weight or risk of loss. However, there is one exception to this rule: self-build mortgages, a loan that supports borrowers looking to build structures like homes on an unfinished property on their own. Because these mortgages offer funds in instalments as construction progresses—rather than providing all funds upfront as with traditional mortgages—the PRA confirmed that they are less risky to finance.
The loan-splitting approach
Unlike the whole-loan approach, which is prohibited in the EU and gives an entire loan a single risk weight based on its loan-to-value ratio, the loan-splitting approach divides a loan into multiple risk weights and applies interest rates to those portions accordingly. These will allow financial institutions to determine how much money to lend based on the risk weight carried by the borrower themselves. Ultimately, that means borrowers can flexibly have their repayment strategies tailored to their current financial situation and risk tolerance. In particular, the PRA proposes the loan-splitting approach for second charge mortgages. These types of loans, which are secured against the equity of a property, let borrowers take out a second mortgage on top of their first one without the need for remortgaging. Loan-splitting would help account for the ‘riskier’ nature of second charge mortgages, as lenders cannot usually start receiving recoveries until the first mortgage is paid.
Dedicated SME support
Another significant Basel 3.1 proposal aims to give the country’s SMEs a boost. Under the new reforms, the PRA will introduce an ‘SME lending adjustment’ that will prevent capital requirement increases for SMEs. This will make it cheaper and ultimately easier for smaller organisations to apply for mortgages, as it will see much of their cost burdens being transferred to lenders. This strategic and more risk-sensitive approach to SME mortgage lending can be vital given that—according to a November 2024 report from Parliament—smaller businesses comprise up to 99% of the UK’s current business population.
Behind Basel 3.1 implementation delays
Through the above policy statement, the PRA also announced that Basel 3.1’s reforms would come into effect at the beginning of 2026. In January 2025, however, the Bank of England further delayed implementation to 2027. The move was made in line with the expected implications of a second Trump administration, with the delay’s announcement coming just three days before his inauguration.
In particular, the bank cited recent statements the president made before being sworn in—including one that, according to The Guardian, implied that he would ‘slash 10 regulations for every new one added.’ Because of the uncertainty this added to when the US itself would start implementing Basel 3.1 regulations—as market analysts widely expect Trump to slash them as well—the PRA concurred with the bank’s decision to move things back to 2027. These concerns proved well-founded given the recent mortgage rate fluctuations caused by the US’ intent to impose tariffs on imports from the UK.
What this means for lenders
Given how they’re designed to ensure lenders minimise loss, it’s clear that Basel 3.1 will aid financial institutions and the UK’s overall economy in the long run. In particular, though they’re poised to lower profitability, they’re also optimised to raise capital levels. As a result, the Bank of England predicts that the UK’s leading banks have the most to gain and will transition more smoothly than their counterparts in the US—here, they’ll only experience a 3% rise in aggregate tier one capital requirements compared to the whopping 16% increase forecasted across the pond.
Unfortunately, the same cannot be said for smaller lenders. According to Simon Hill, the director of Prudential policy at UK Finance, Basel 3.1 will particularly place mid-tier banks in a precarious position where they’re still in the process of growing their assets but will be required to accommodate the heavier financial requirements of borrowers like SMEs. Due to the limited resources they have at their disposal compared to larger banks, they can thus potentially experience capital requirement increases of up to 30%. These challenges pose the need for a comprehensive Basel reporting solution that can better resolve the mid-tier lender’s more pressing risk management needs.
OneSumX, which combines data, calculation, and reporting features, shows that those set to be more affected by lending reforms can leverage technology to this end. The software is scalable, making it suitable for lenders of all sizes. Additional Exact Regulatory Metrics can help generate more accurate data insights, which can inform fully compliant lending decisions that minimise risk while maximising revenue. With the extensive implementation delays created in response to the second Trump administration, smaller lending institutions have the time to test such solutions out before Basel 3.1’s reforms go into effect.
What this means for borrowers
Though Basel 3.1’s lender-focused framework is poised to benefit SME borrowers and improve the UK economy’s overall competitiveness, it may impact others looking to apply for mortgages in unintended ways. The Mortgage Finance Gazette particularly pointed out that the reforms may be especially detrimental for buy-to-let landlords who manage more than three properties.
As the PRA considers such landlords to not be materially dependent on the income they earn from their properties, it’s proposed that lenders impose higher mortgage costs on these borrowers. Basel 3.1 may thus significantly impact their bottom lines. That’s especially true since its regulations will follow other recent changes unfavourable to buy-to-let landlords, including reducing tax relief for mortgage financing. As such, landlords may similarly want to look into mitigating potential risks using property management tools.
Here, the likes of Landlord Studio’s finance management software can help bolster profitability and future-proof operations before 2027. Now an end-to-end solution thanks to its recent partnership with the Sure platform, it provides ‘DIY’ landlords with features suitable for offering home warranties and simplifying tax filing to minimise reductions. It can also aid users looking to secure buy-to-let mortgages, with additional features such as automated income expense tracking and tenant management features available to improve profitability so landlords can better handle Basel 3.1’s higher capital requirements and mortgage costs come 2027.
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