In its proposed guidance, the regulator said that while second charges were excluded from the rule for the time being it was an ‘obvious source of potential leakage’.
It said: “Although outside the limit, we expect firms to take the intended outcome of this limit into consideration when agreeing to second charge mortgages.”
Further loan types which will be excluded from a lender’s high LTI limit are lifetime mortgages and remortgages where the loan amount is not being increased. This includes remortgages originally offered on a high LTI basis.
The regulator said it does not consider rolling in ‘reasonable’ remortgage fees and costs such as valuation, legal and administration fees, into the mortgage balance as an increase in the original loan amount.
Buy-to-let mortgages do not count towards a lender’s high LTI limit.
Mark Carney announced the Financial Policy Committee’s intention to enforce a cap on high LTI lending in his presentation of the Financial Stability Report in June.
Mortgage lenders with annual residential lending in excess of £100m must limit the number of mortgage loans made at or greater than 4.5 times a borrower’s income to no more than 15% of their total number of new mortgage loans.
Carney’s rationale for introducing the cap was to prevent instability in the wider economy as a result of increased household indebtedness.
He said the British people were committed to maintaining their mortgage payments in the face of financial difficulty which meant that the wider economy would suffer as homeowners reigned in their spending to keep on top of payments.
Criticism of the cap suggested first-time buyers would be the biggest losers as they were the most likely to need the highest stretch in income. The regulator said it had considered that first-time buyers, and therefore indirectly young people, may be discrimated against as result of the cap.
In its guidance it said: “Unlawful discrimination does not occur if the less favourable treatment afforded to a particular group is a proportionate way of achieving a legitimate aim.”
Mortgages which complete on or after October 1 will be counted towards the limit irrespective of the when the decision in principle or mortgage offer was produced.
Firms which do not follow the guidance will be subject to supervisory action.
The consultion closes on September 5.
