35% risk weighting under the SA for secondary residences like holiday homes
Pascal Di Prima
Co-Founder & CEO Lexemo | AI Workflow & Process Automation for Legal and Compliance
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The EBA recently published an answer within the Q&A process regarding the 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).
The question was in particular, whether a second home can be a residential property under Article 4(75) CRR and thus a respective mortgage benefit from the 35% risk weight under Article 125(1)(a) CRR.
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.
According to EBA, 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.
Thus, secondary residences like holiday homes covered by a respective mortgage benefit from the 35% risk weight under Article 125(1)(a) CRR.
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.