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Stuck in the middle: private banks confused by LTI caps

by: Ian Gray
  • 23/09/2014
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This week the Prudential Regulation Authority (PRA) said 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.

But it all depends on which one of these risks the PRA is trying to mitigate.

If the PRA’s main aim is to temper house price rises, then this argument will fall on deaf ears. Giving private banks special permission to lift the LTI cap would have the exact opposite effect to this concern of shrinking a perceived house price bubble.

We know that the Bank of England’s view is that the higher value properties, and the wealthier buyers who pay for them, are pulling up the average house price rises and then mainly only in London and the South East. Their worry is that these areas are experiencing an unhealthy bubble, which if it burst would make the market suffer.

However, if the PRA’s main aim with this is to protect potentially vulnerable borrowers from having taken on too much debt in a rising interest-rate environment, then I absolutely agree.

We have also seen the private banks express a great deal of confusion and frustration over this LTI cap applying to their average client. 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.

Did you know that the average mortgage loan with a private bank is repaid in full before seven years have passed? It is very true that the normal rules should not apply to wealthier borrowers when it concerns whether they can afford their mortgage.

However, we already have a framework set out by the FCA to define high net worth borrowers – so one doesn’t need to reinvent the wheel on this because research into this has been done recently. If income is more than £300,000 per year, or if the borrower has a net asset position over £3m outside their home, then they fall into the definition of a high net worth borrower, and thus the guidelines around the MMR and affordability are relaxed already.

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. 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.

Private banks and high street lenders alike clearly don’t know what to do with this conflicting guidance, and so they are just pulling back more than is necessary for fear of falling foul of one rule or another.

Ian Gray is senior partner at largemortgageloans.com

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