In its latest Financial Stability report, the Financial Policy Committee (FPC) said that it would maintain its loan to income (LTI) for residential mortgage recommendations, which asserts that 15 per cent of the total number of new residential mortgages should not have a LTI ratio at or greater than 4.5. This applies to lenders whose residential mortgage lending is above £100m per year.
The FPC said that the LTI measure was more effective at reducing risk in a housing boom and also had less impact on borrowers in normal times.
It added that the FCA’s rules on affordability test combined with the FPC’s LTI limits “should be enough to protect UK financial stability”, and that it would also “make the rules simpler”. Therefore, it would consult in the first quarter of next year on withdrawing its affordability measure.
The FPC’s mortgage market recommendations, which it introduced in 2014, strengthened affordability assessments to prevent consumers from taking on unaffordable mortgages and made firms consider the impact of future interest rate rises on affordability.
Reports earlier this week had suggested that homebuyers could be allowed to borrow up to six or seven times their income, as opposed to 4.5 currently. The change would have allowed borrowers to take out larger loans, and potentially open up the housing market to younger borrowers who may need to borrow more to get their foot on the property ladder.
The FPC said that it was reviewing the measures in December last year and said that it would report the conclusions in the second half of this year.
Miles Robinson, head of mortgages at Trussle, said: “These changes should be approached with an air of caution. The rules were introduced in the wake of the financial crash to reduce the risk of homeowners accidentally taking on debt that could leave them vulnerable. As such, they are in place to protect homeowners from any volatility that can come from interest rate rises.
“However, soaring house prices mean that younger buyers on average have to save for 10 years to secure the large deposits that are typically needed to access the housing market. As such, relaxing the rules just slightly could enable hundreds of thousands of first-time buyers to own their own home much more quickly.”
Renters limited by FPC recommendations
A report earlier this year on Bank Overground, estimated that a quarter of renters could potentially see their borrowing options limited by their income under the FPC’s interest rate stress test.
The remaining three quarters of renters were constrained by the LTV limits.
It added that nine per cent of all renters could afford median-priced first-time home in their region, based on their current income and savings. Without the FPC rules in place then 11 per cent renters could afford a median-priced first-time home in their region.
The report said this suggested that two per cent of renters could afford a median-priced home in their region if they could borrow more than affordability tests currently allow.
It said: “This does not mean these renters are locked out of the housing market altogether. They could raise a larger deposit or take out a smaller mortgage on a less expensive property, consistent with the FPC’s intention to limit the number of highly indebted households.”
Mortgage debt and high LTV lending
In its Financial Stability Report in July, the Bank of England said that the mortgage debt and high LTV lending had risen slightly but were not near the highs of the financial crisis.
It said that the overall share of UK householders with debt-servicing ratios of 40 per cent or higher was 1.4 per cent in March. It said that this was higher than its pre-Covid equivalent, but below the 2007 high of 2.7 per cent.
It added that as of May, 80 per cent of households who took mortgage payment holidays had returned to regular payments.
The report added that in Q1 of this year six per cent of new lending to owner-occupiers was at 90 per cent LTV or above, which was down from 20 per cent in 2019. This was partially due to lenders pulling their higher LTV products during the pandemic.
It said that the proportion of high LTV loans out all outstanding mortgages was still lower than pre-global financial crisis level.
The share of new mortgages LTI ratios of 4.5 or higher increased to 10.4 per cent in Q1 this year, up from 9.5 per cent in the same period last year and below the FPC limit of 15 per cent.
