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FCA study of high loan to income mortgages: Key findings

  • 17/02/2020
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FCA study of high loan to income mortgages: Key findings
In a 52-page paper, the Financial Conduct Authority (FCA) has examined the before and after effects of the high loan-to-income (LTI) cap on consumers and lenders' behaviour, analysing data spanning from July 2012 to June 2016.

In June 2014, the Financial Policy Committee recommended that the regulators made sure mortgage lenders did not lend more than 15 per cent of their book to borrowers with an income multiple at, or higher than four and half times the value of the loan.

The regulator’s main finding was that lenders had used their 15 per cent allowance to help home movers looking for large mortgages, rather than first-time buyers trying to get a foot on the property ladder.

Here’s what else the regulator found.

The mortgage size for loans with an LTI in excess of 4.5 increased by four to seven per cent suggesting lenders are targeting borrowers with higher incomes.

The proportion of LTI lending to homemovers and joint applicants increased while the proportion of lending to first-time buyers decreased.

Lots of firms have played just within the rules. The volume of new mortgage lending at LTI ratios just below the 4.5 ratio has risen causing what the FCA refers to as a ‘bunching’ effect.

To help with mortgage affordability, the length of mortgage terms on loans with an LTI ratio of between 4.5 and five times has increased by seven to 13 months.


Regional differences

The regulator found evidence that high LTI mortgages have been shifted towards regions with higher average income and house prices, which supports the findings that the average loan size has increased.

The move away from lending to first-time buyers in favour of home movers for loans requiring a stretch of 4.5 times income or more, can be seen more in southern and midland regions. However the shift is particularly noticeable in the North West and Yorkshire and the Humber.

The overall proportion of high LTI income did not change after the implementation of the cap, remaining at around 10 per cent of overall lending. Lenders’ individual appetite for high LTI lending did change, however.

Some banks that were already lending around the 15 per cent limit, pulled back, while other lenders that had previously had a low share of such lending, ramped up their volumes.

The cost of high LTI mortgages was expected to rise, as the cap restricted their supply but this trend did not materialise. Instead, the cost of high LTI mortgages has fallen by around six to eight basis points.

The FCA said there could be a number of reasons for this price reaction, including that lenders were cherry picking only the most low risk of borrowers, therefore offering the cheapest rates.


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