GC14/4 Guidance on the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending

We invite views on the proposed guidance on the loan to income (LTI) ratio for residential mortgages.

Why are we publishing guidance on this?

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.

The PRA is consulting on proposals to implement the FPC’s recommendation by making a rule that applies to banks, building societies, friendly societies, industrial and provident societies, credit unions, PRA designated investment firms, and overseas banks based outside the EEA in relation to their UK branch activities. These rules apply to these firms’ at as subsidiary level not already caught by the rules.

Our proposed guidance sets 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.

This is general guidance that does not relate to the FCA Handbook. Cost benefit analysis is not included in this consultation.

GC14/4 Guidance on the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending

Who does this guidance affect?

FCA-authorised mortgage lenders that are not a subsidiary of a PRA-authorised firm that is a bank, building society, friendly society, industrial and provident society, credit union, PRA-designated investment firm and overseas banks.  

The consultation will be particularly relevant to FCA-authorised mortgage lenders with annual residential mortgage lending in excess of £100m, because they should consider what actions could be taken to meet the expectations in the proposed guidance.

What are the next steps?

Please send us your views by 7 September 2014. Send your responses by email to LTIratios@fca.org.uk or by post or telephone to:

Hillary Neale
Policy, Risk and Research Division
The Financial Conduct Authority
25 The North Colonnade
London E14 5HS

Telephone: 020 7066 4856