Blogging for the BBA, Nicholas Smith wrote: “Loan-to-income (LTI) ratios should enhance the resilience of the UK financial system by tempering house price rises and ensuring that customers aren’t taking on too much debt.”
However, Smith said the legislation could damage the small but important private banking sector by curbing its lending to wealthy borrowers whose incomes are derived from assets and income rather than income alone.
But Ian Gray, senior partner at specialist broker firm Large Mortgage Loans said before the BBA’s call for immunity, regulator the Prudential Regulation Authority needs to be clear on its motivation and goals.
If the Bank wants to use an LTI cap to prevent the housing market from overheating in London and the South East, making HNW borrowers exempt is counter-productive. Wealthy borrowers would be able to continue to drive up prices by buying homes while the rest of the market remained locked out.
But if the objective was to stop average borrowers from becoming over-indebted and therefore unable to cope with any fluctuations in salary, interest rates or unforeseen circumstances, it would be right to exclude HNW clients.
“The average client of a private bank earns a very high income and has a great deal of fallback position in their assets, should anything go wrong, or should rates rise beyond what they’d expected when they took out the mortgage,” said Gray.
The Financial Conduct Authority (FCA) has already agreed to use a light touch regulatory approach for HNW clients. These borrowers are defined as having an income of more than £300,000 a year or a net asset position of at least £3m, under the Mortgage Market Review (MMR) rules.
Gray said the FCA’s stance that HNW borrowers did not need the same level of protection afforded to consumers was at loggerheads with the Bank’s blanket LTI cap, if it is intended to prevent over-debtedness.
“Private banks are now faced with a huge degree of confusion around who they should listen to, because they have contradictory guidance from the FCA and from the PRA,” added Gray.
“The FCA is telling them that they can relax the rules on LTI ratios for wealthy borrowers, but the PRA is implying that it’s these very borrowers who are causing the problem around house price increases.”
Gray wants to see the FCA and PRA co-ordinate a joined up approach to prevent further mixed messages.
