LTI shift offers hope for first-time buyers, but only as part of a wider fix – Bamford

All of this has created a tense and reactive market, particularly for first-time buyers, who may already have been stretched on affordability.

Against that backdrop, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) consultation on loan-to-income (LTI) limits feels like a step in the right direction, particularly because moving from firm-level caps to a market-wide approach gives lenders more room to support borrowers who can afford higher income multiples while also reflecting what the original policy was meant to achieve, which was to protect the system overall rather than restrict individual firms in isolation.

Early signs from the already-established temporary changes suggest this approach can work in practice, with more than 1,000 extra first-time buyers per month said to be entering the market, which is a meaningful shift at a time when access to lending was tight.

Affordability remains the core issue

The new reality, of course, is rates are now higher and look set to stay at these levels for the short term at least, which has a direct and ongoing impact on affordability, as even modest changes in pricing can push borrowers outside lender criteria – particularly those at the start of their homeownership journey, who may have less flexibility in their finances.

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In the last couple of years, to combat similar market conditions, we saw lenders respond with a degree of product innovation, including offerings that took rental history into account, more flexible underwriting approaches, and schemes aimed at helping buyers bridge the gap, but there are clear limits to how far product design alone can go when the underlying affordability model is under sustained pressure.

This is where LTI flexibility can play a role, as it allows lenders to support borrowers who are financially sound but fall just outside standard income multiples, although it is important to recognise this is not a complete solution in itself.

LTV availability tells another story

At the same time as this consultation is taking place, we have seen a sharp reduction in high-loan-to-value (LTV) products, with my own analysis showing that around 70 products at 95% LTV have been withdrawn in the past month alone, which represents a significant reduction in choice.

This underlines a wider issue within the market, which is that LTI and LTV need to work together effectively, because higher income multiples are of limited use if borrowers cannot access high-LTV products in the first place – particularly given that for many first-time buyers, the deposit remains the biggest barrier to purchase.

Without a strong and consistent range of 95% (and potentially even bigger) LTV products, changes to income caps will only go so far in improving access, which means a healthy market needs both elements operating in tandem.

Balance is key for lenders and regulators

There is a clear opportunity within these proposed changes, but it will require careful handling from both lenders and regulators in order to achieve the right outcomes.

For lenders, the added flexibility needs to be used with discipline, ensuring higher-LTI lending is directed towards borrowers with strong income prospects, stable employment, and a clear ability to afford repayments over the long term, rather than being applied too broadly.

For regulators, the challenge lies in striking the right balance between improving access and maintaining appropriate levels of risk control, particularly as the overall 15% flow limit remains in place for a reason, acting as a guard rail for the system even as the move to a market-level cap allows lending to flow more freely where it is most appropriate.

Clarity will be essential throughout this process, as lenders need to understand how far they can go, while advisers need confidence that criteria will remain consistent and predictable for their clients.

A positive step, but not the full answer

This consultation does, however, represent a positive development, as it shows our regulators are willing to respond to market conditions and make adjustments where necessary, while also recognising rigid rules can have unintended effects, particularly in a higher rate environment.

However, it is only one part of a much broader picture, as a strong first-time buyer market depends on several factors working together, including stable pricing, a good range of high-LTV products, flexible affordability models, and clear, consistent regulation. And don’t get me started on supply.

If these elements can be aligned effectively, then this change to LTI limits could play a meaningful role in improving access to homeownership, but on its own, it will not resolve all the challenges currently facing first-time buyers – even though, if managed correctly, it is clearly a move in the right direction.