Regulations to restrict lending at high income multiples has pushed up the average loan size for high-LTI mortgages, a research paper published by the FCA reveals.

In 2014 the Financial Policy Committee recommended that the Prudential Regulation Authority and the Financial Conduct Authority “ensure that mortgage lenders do not extend more than 15 per cent of their total number of new residential mortgages at loan-to-income ratios at or greater than 4.5”.

However, the restriction only applied to the number of loans at high LTIs and not the value of those loans.

The occasional paper published today by senior associate in the FCA’s economics department Adiya Belgibayeva, looked at whether lenders might try to “optimise their credit allocation of high LTI mortgages”.

The study considered whether “lenders may have incentives to extend high LTI mortgages on bigger loans, because the lender may wish to: 1) maintain interest income; and/or 2) maintain the level of the total value of new mortgages”.

The paper, which looked at mortgage advanced between 2012 and 2016, found that the introduction of the LTI cap did appear to have increased the average loan size by 4-7 per cent.  

It says that “an increase in the average loan size suggests that lenders migrated towards borrowers with higher incomes”. 

There were also changes in the composition of the high LTI borrowers. 

Results suggest that above the 4.5 x income cut-off there is an increase in the proportion of home movers; a decrease in the proportion of first-time buyers and an increase in the proportion of joint income applicants.

The average loan size for home movers, joint income applicants,

first-time buyers, and single income applicants, is around £190,000, £180,000, £150,000, and £140,000, respectively. 

The paper also found evidence that the prevalence of high LTI mortgages has shifted towards the regions with higher average income and house price, which is also consistent with the increase in average loan size.

In her research, Belgibayeva found that prices for high LTI mortgages have come down since restrictions came into force, but the overall proportion of high LTI mortgages had not changed much, remaining at around 10 per cent.

It found that some lenders reduced their share of high LTI loans, while others increased their share.Before the recommendation lenders differed in their exposure to high LTI mortgages,