FCA and PRA confirm permanent removal of high-LTI mortgage cap
Regulators have permanently removed the 15% firm-level restriction on high-loan-to-income (LTI) mortgage lending and have drafted a new policy to reflect this.
The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published draft policy changes today, stating they would adopt a rolling four-quarter measure to calculate individual high-LTI flows to determine whether adjustments are needed to reduce market risk.
The regulators will also publish data to inform lenders on trends in the market and adjust their guidance to make expectations clearer.
Lenders that have already applied to exceed the 15% lending limit will not need to take further action as the directions will cease on 28 October.
The first aggregate flow of high LTI will be published by the PRA in Q4, covering the Q3 period.
If any action is required to reduce risk, the PRA said changes should be made with regard to future lending and existing approved mortgage offers should not be withdrawn.
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As an example, the PRA may communicate to firms or groups that exceed the 15% flow on a four-quarter basis to reduce future flows by a fraction, such as a fifth each consecutive quarter until it is equal to or less than 15%.
Most lenders agree with cap removal
The FCA and PRA consulted on the changes, gathering responses from 15 firms and organisations, including April Mortgages, Broadstone, the Building Societies Association (BSA), Gen H, Lloyds Banking Group, Nationwide, Skipton Building Society, UK Finance, Whistlebrook and Yorkshire Building Society.
The other respondents did not consent to be named publicly.
Six respondents agreed with removing the firm-level cap that restricts each lender to issuing no more than 15% of their book in high-LTI mortgages but agreed that the 15% restriction should be maintained in aggregate.
Two respondents said the firm-level cap should remain, but said the threshold could be increased. The regulators said simply increasing the cap would undermine their ability to maintain the aggregate level of high-LTI lending and could prevent some lenders from aligning their lending strategies with their own risk appetite and business model.
Seven respondents agreed that the increased flexibility should be supported by greater governance and controls, and the regulators said this would be managed through existing routine supervisory engagement on an individual basis.
Some firms suggested that the 4.5 times income limit for high-LTI lending was “out of date” and did not reflect the current market, proposing this increase to an income multiple of five.
Feedback suggesting the ‘de minimis’ threshold be reviewed was outside the scope of the consultation, regulators said, but has been passed on to the Financial Policy Committee (FPC) to consider in the future. The FCA said it would be considering this with respect to its Mortgage Rule Review.
Quarterly measures could provide a distorted view of the market
The regulators consulted on the use of a single-quarter measure of high-LTI lending and six respondents raised concerns that reviewing the flow of high-LTI lending quarterly could reflect seasonal or volatile periods and therefore result in regular regulatory intervention.
A further seven respondents said it would be difficult for lenders to predict single-quarter lending, while three said this could become challenging if there was a collective adjustment resulting in high-LTI lending at the same time.
The regulators will proceed with a single-calendar-quarter measure to monitor the aggregate flow of high-LTI lending but use a four-quarter rolling measure to determine necessary adjustments. They said this would give them a timelier insight into trends while maintaining the market-wide 15% limit.
They said this approach would enable firms to reduce high-LTI flows in a “smooth manner”, accounting for market volatility and avoiding excessive adjustments.
The PRA said it expected firms entering into high-LTI mortgage contracts to do so “prudently” and lenders that are part of a group should apply expectations at group level.
Income ratio limit should be reviewed
Alison Verlander, director of mortgages at UK Finance, said: “UK Finance and its members have long called for these reforms, which will help lenders support more creditworthy people into homeownership while maintaining important overall safeguards. Moving to a rolling four-quarter assessment will also make high loan-to-income lending easier to manage and reduce unnecessary uncertainty for lenders and customers.
“To build on this positive step, the next review should look at whether the 4.5 times income threshold could be increased to five times and individual’s income, which would provide the flexibility to increase lending when that is affordable and appropriate. In many parts of the country, the biggest challenge facing prospective homeowners is the high cost of housing and this would help address that challenge.”
