FG14/8 - Guidance on the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending

Published: 01/10/2014     Last Modified: 01/10/2014

What did we consult on

In June 2014, the Financial Policy Committee (FPC) made a recommendation to the Prudential Regulation Authority (PRA) and the FCA about the loan to income (LTI) ratio for residential mortgages:

The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable.

Our proposed guidance set out:

  • how we expect firms to act in light of the FPC’s recommendation
  • how we will determine which firms should apply the LTI limit when the guidance comes into effect
  • how we will determine which firms should apply the LTI limit on an on-going basis
  • how we will monitor if a firm’s mortgage lending is consistent with our expectations on the LTI limit and what supervisory action may be taken

FG14/8 - Guidance on the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending

Summary of feedback

The main feedback issues were:

  • impact on the ability of private banks and wealth managers to provide regulated mortgage contracts to high net worth individuals (HNWI)
  • impact on competition – specialist firms will be harder hit than those that are part of larger (banking) groups
  • the guidance was open-ended and suggestions for a sunset clause or a review date to be included
  • the scope of the recommendation – the inclusion of buy to let or bridging loans
  • the definition of a ‘quarter’ for the purposes of data collection.
  • the treatment of mortgages ported from one property to another with no increase in the principal borrowed

Response to feedback

We have been liaising with the PRA to ensure that our guidance is consistent with their rules:

  • we are going to set a threshold of a minimum number, as well as a minimum value, of mortgages that a firm has to write before it is expected to apply the LTI limit
  • a firm that is part of a group may allocate all or part of its high LTI allowance to any other member of the group.
  • the LTI limit applies to all regulated mortgage contracts, as defined in the Regulated Activities Order 2000. This will include some bridging loans and a very small amount of buy-to-let lending that fall within that definition. It will also include mortgages ported from one property to another regardless of whether or not there is any increase in the principal borrowed
  • the quarters used to assess whether a firm is above the £100m threshold and whether a firm exceeds the 15% LTI limit will be the same as those defined in Product Sales Data, subject to the consecutive sets of four quarters being on a rolling basis

As a result of representations received, we have amended our guidance to:

  • show that firms have to write a minimum volume, as well as a minimum value, of mortgages over four consecutive quarters before they are expected to apply  the LTI limit
  • allow the application of the LTI limit to be at group, rather than regulated entity, level

 

Back to top >