UK BoE Mortgage Collateral Update

On May 23, UK BoE issued residential mortgage collateral notice.

  • UK BoE published a market notice entitled, Updates to eligibility of residential mortgage collateral in the Sterling Monetary Framework (SMF) to reflect the Domestic Minimum Energy Efficiency Standard (MEES) Regulations, dated May 23, 2024.
  • Part of the SMF documentation for BoE operations under SMF, to be read in conjunction with other SMF documentation, as supplemented and amended from time to time.
  • Eligibility Criteria
  • Market notice sets out changes to collateral eligibility that BoE is making to manage financial risks in residential mortgage collateral in the Sterling Monetary Framework.
  • As set out in the Domestic Minimum Energy Efficiency Standard (MEES) Regulations, since 2018 rental properties in England and Wales are required to have current energy performance certificate (EPC) rating of at least E, or a valid exemption, to be let out.
  • To mitigate risks associated with non-compliant properties, BoE is updating its eligibility criteria for buy-to-let (BtL) mortgages, specifically, non-compliant mortgages will no longer be eligible as collateral in the Bank of England's SMF operations.
  • Where a property has a valid exemption in place, the SMF counterparty must confirm this to the BoE in order for the mortgage to be eligible as SMF collateral.
  • BtL mortgages for which SMF counterparties do not provide EPC ratings that are originated after Aug. 1, 2024 will likewise be ineligible as SMF collateral.
  • For BtL mortgages prior to Aug. 1, 2024 with no reported EPC ratings, BoE will apply tiered treatment to recognize some challenges that lenders face in obtaining data.
  • For operational reasons, BoE will not require SMF counterparties to remove affected loans from their mortgage pools, but they will be assigned zero nominal value or, if originated before Aug. 1, 2024 with no reported EPC ratings, a reduced nominal value.
  • These changes to eligibility criteria do not apply to owner-occupied mortgages.
  • Haircut Adjustments
  • EPC ratings provide insights into mortgagors' exposure to energy price shocks.
  • BoE is adjusting haircut models to protect against potential financial losses arising from mortgagors' exposure to energy price shocks in owner occupied mortgage collateral.
  • Relevant mortgages with no reported EPC ratings will be subject to conservative assumptions, will tend to increase collateral haircuts relative to a scenario in which counterparties provide EPC data, adjustments to be rolled out with similar measures.
  • To protect against possible financial losses from risk of more frequent, severe flooding.
  • Effectiveness
  • All changes set out in the market notice will become effective on Aug. 1, 2024.

Regulators UK BoE
Entity Types Bank; BHC; BS; Depo; SIFI
Reference Nt 5/23/2024
Functions Accounting; Financial; Operations; Reporting; Risk; Settlement; Treasury
Countries United Kingdom
Products Banking; Loan; Mortgage
Regions EMEA
Rule Type Final
Rule Date 5/23/2024
Effective Date 8/1/2024
Rule Id 213385
Linked to N/A
Reg. Last Update 5/23/2024
Report Section UK

Last substantive update on 05/28/2024