So, it seems incredible to hear the governor of the Bank of England say last week in his Mansion House speech that “there are some signs of underwriting standards becoming more lax, with the proportion of high loan-to-income multiples (LTI) at an all-time high”.
As we all know MMR quite deliberately shifted the industry away from the use of LTI multiples to a more forensic affordability test – although a number of lenders do use shadow income multiples as their back stop. Is the Bank’s Financial Policy Committee (FPC) right to be concerned about rising LTIs in recent months?
Data published by the PRA this month showed in the first quarter of the year, 11.6% of loans were made to individuals at LTI multiples of 4.0 or more, the highest figure on record since the data-set began in Q1 2007.
Similarly, the proportion of loans advanced to joint borrowers at LTIs of 3.0 or above is at a near record high of 26.8%, with the only higher figures in Q3/Q4 2013.
So yes there has been an increase as the governor states, but what about those loans with a mixture of both high LTI and high loan-to-value (LTV)? Well, 2.6% of all mortgage loans were at LTV ratios of 90%+ with a high income multiple, up from 1.5% in Q4 2013. This is a low percentage, and far below the 8.8% pre- crisis average, but it has been gradually rising.
It is clear from the governor’s comments that “over extended borrowers could threaten the resilience of the core of the financial system due to credit to households being the lion’s share of domestic lending.”
But credit to households covers far more than just mortgage debt.
In my view intervening too early in the mortgage market could drive some borrowers to other forms of credit as well as freezing up the market and undoing much of the good work done by lenders and government since 2012.
The FPC is right to keep a cautious eye on how the market develops but in my opinion it is too soon to be alarmed and react with a blanket limit on LTI or LTV.
Paul Broadhead is head of mortgage policy at the Building Societies Association
