Can a second home be a residential property under Article 4(75) of Regulation (EU) No 575/2013 (CRR) and thus a respective mortgage benefit from the 35% risk weight under article 125(1)(a)?

Subject matter : Risk weighting under the Standardised Approach for credit risk for an exposure secured by a mortgage on a residential property which is a second home (for instance, a holiday home).

Question:
Can a second home be a residential property under Article 4(75) of Regulation (EU) No 575/2013 (CRR) and thus a respective mortgage benefit from the 35% risk weight under article 125(1)(a)?

Background on the question:
Article 125(1)(a) does not specify whether the residential property which is or shall be occupied or let by the owner has to be a primary home or also refers to second homes and additional residential properties which are occupied by the owner occasionally.

Article 4(1)(75) defines residential property as a residence which is occupied by the owner or the lessee of the residence. The reference to "is occupied" should be understood as a requirement of continuity in the occupation, i.e. the residence must be a primary home.

Article 125(1)(a) widens the scope of application of article 4(1)(75) by including residences that are not currently occupied but that will be occupied in a future, which adds a temporary feature that allows primary homes to qualify for the 35% risk weight even if they are not occupied yet.

Since the borrower of a primary home mortgage has a keen personal interest in keeping the property of his/her primary home, this personal commitment justifies a beneficial risk weight treatment compared with a mortgage on second or additional residential properties.

Consequently, only primary home mortgages should qualify for the 35% risk weight envisaged in Article 125(1)(a).

Date of submission: 24/02/2016
Published as Final Q&A: 06/01/2017

EBA answer:
Unless relevant higher risk weight or stricter criteria have been set by the competent authority under Article 124(2) Regulation (EU) No 575/2013 (CRR), in accordance with Article 125(1)(a) CRR), exposures secured by mortgages on residential property may cover both primary and secondary residences provided that they are or shall be occupied or let by the owner or the beneficial owner in the case of personal investment companies. Provided the aforementioned criteria are met, a holiday home may qualify as residential property even if it is used by the owner only for a limited number of days during the year.

This treatment does only apply to exposures fully and completely secured by mortgages on residential property, and not where units were to be exploited commercially. For further guidance on residential and commercial properties, please see Q&A 1214.

Exposures secured by mortgages on residential property which meet the definition of "speculative immovable property financing" in Article 4(1)(79) CRR and are therefore assigned to the exposure class for "items associated with particular high risk" according to Article 128(2)(d) CRR do not qualify for the 35% risk weight.

This answer is notwithstanding the Regulatory Technical Standards on conditions for capital requirements for mortgage exposures that will be developed under Article 124(4)(b) CRR.

Source: EBA statement