The Bank of England’s Financial Policy Committee (FPC) said lenders reported that they lowered stress rates by around 110 basis points on average on lending fixed for five years or less, following the regulator’s endorsement in March.
Santander was the first major lender to react, while Barclays and Nationwide made similar moves to improve affordability.
The FPC said, despite this easing, existing lending policy meant the share of households with a high debt-servicing ratio would remain below levels seen during the global financial crisis.
It said the future stock of borrowers would have less resilience against interest rate shocks and arrears could rise, but the loan to income (LTI) flow limit would help to contain this.
While the LTI flow limit threshold has been raised so it does not apply to lenders issuing up to £150m in residential mortgages each rolling quarter, the FPC said maintaining the restriction of this lending to 15% of a lender’s book would “strike the right balance between providing appropriate protection from the increased risk to economic growth of large cuts to consumption associated with an over-indebted household sector, while providing sufficient capacity for otherwise creditworthy households to borrow at higher LTIs”.
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The FPC debated whether there were factors which could lead to lenders not making full use of the high LTI lending allowance, and said based on engagement with the industry, differences in risk appetite and business models meant lenders would not issue many mortgages at high LTIs and many had buffers in place to ensure they did not reach the limit.
The committee recommended that the £100m threshold should be increased to £150m while maintaining the 15% flow limit, allowing individual lenders to complete high LTI lending at above 15% of their book while keeping the aggregate or industry-combined flow of lending consistent.