Large lenders will be able to top their current 15% loan-to-income ratio limits to allow for greater mortgage lending, under new guidance from a key Bank of England committee.
The Financial Policy Committee says that “individual lenders [should be allowed] to increase their share of lending at such high LTIs, while aiming to ensure the aggregate flow remained consistent with the limit of 15%,” in its latest report.
Previous FPC guidance, in place since 2014, had ruled that overall new residential mortgage loans greater than 4.5 times a borrower’s income should not exceed 15% by large lenders.
In practice, this saw lenders restrict this type of lending below this level. This saw some larger lenders well below this level, while others had to cut back on this type of lending to remain inside the guidance.
However, regulators have come under pressure to lift this cap to allow more home loans to be written, particularly to first-time buyers.
Nationwide, Skipton Building Society and UK Finance are among a number of larger lenders and bodies that have campaigned for the LTI limit to be raised to around 20%.
While Labour has called on watchdogs to relax a range of City regulations to boost its growth agenda.
The FPC – which includes Bank of England governor Andrew Bailey and Financial Conduct Authority chief executive Nikhil Rathi – issued the new guidance to the Prudential Regulation Authority and FCA.
The FPC adds: “The FPC recognises that, in doing so, such high LTI lending by individual lenders could exceed 15% of their total number of new residential mortgages while the aggregate flow remains consistent with the 15% limit.
“The aggregate flow is calculated based on new residential mortgages extended by lenders which extend residential mortgage lending in excess of £150m a year.”
Lenders and their bodies welcomed the move from regulators.
Nationwide estimates that the new flexibility could allow it to lend to 10,000 more first-time buyers a year.
Nationwide chief executive Debbie Crosbie says: “We have long argued that relaxing this regulatory restriction will provide confidence to both lenders and housebuilders without materially increasing risks.
“It will help people who struggle to get on the property ladder because high rents and living costs have made saving for a deposit and meeting mortgage affordability tests extremely challenging.
“This is a welcome move and a strong signal that government and regulators are working together to boost economic growth and competitiveness.”
The vast majority of Nationwide’s high LTI lending is done through its Helping Hand loans scheme, which allows eligible first-time buyers to borrow up to six times their incomes.
The Building Societies Association head of mortgages and housing Paul Broadhead adds: “We have been calling for an uplift in the FPC LTI flow limits for some time, and it is likely that today’s announcement will deliver meaningful benefits to aspiring homeowners, and in turn, help stimulate economic growth.
“We look forward to continuing to work with regulators and government to review mortgage regulation to ensure that we have a market that is innovative, fit for the future and maintains consumer protection at its heart.”
UK Finance director of mortgages Charles Roe points out: “Coupled with changes the FCA is making to its mortgage affordability rules, this announcement should benefit first time buyers as well as those looking to move up the housing ladder.”
Both the BoE and the FCA had voiced concern about lifting this limit this year.
Bailey and Rathi pointed out in separate Treasury committee hearings that such a move would risk possessions rising from around 1,000 a quarter, a historically low figure.
They added that lifting this limit, without a significant rise in housebuilding, would lead to higher house prices.
Yesterday, the FPC said that small lenders who underwrite residential mortgages up to £150m a year will not be bound by the loan-to-income flow limits of larger institutions.
The move by regulators comes into effect on 11 July and lifts the previous threshold from £100m, which has also been in place since 2014.
