The Financial Conduct Authority is to publish “general guidance” to firms to fulfil recommendations from the Bank of England to introduce mortgage income multiple caps to cool the housing market.
Today (26 June) the Financial Policy Committee published a report which recommends regulators ensure mortgage lenders limit the amount of their customers that are able to take out a mortgage at more than 4.5 times their income.
In a highly anticipated move, it recommends that no more than 15 per cent of a lender’s book can account for such high loan-to-income multiples.
The FCA said that following the FPC’s recommendations, it will consult on general guidance which will provide details on how it proposes to follow the loan to income ratios.
The FCA said in a statement: “This will only affect a small number of FCA regulated firms so general guidance is considered a proportionate and appropriate approach to implementing the loan to income ratio, especially whilst the industry continues to adjust to the Mortgage Market Review.”
The Bank of England’s Financial Stability Report, published today (26 June), warns that those households with higher levels of debt are more likely to encounter payment difficulties in the face of shocks to income and interest rates.
“This could pose direct risks to the resilience of the UK banking system, and indirect risks via its impact on economic stability,” the report states.
The report flags up that the recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan-to-income multiples.
Data from the Financial Conduct Authority published earlier this month revealed the number of people taking out a mortgage that is 3.5 times their income has increased, but those taking a mortgage at four times their income multiple had stayed steady.
The FPC’s new recommendation applies to all lenders which extend residential mortgage lending in excess of £100m per annum, and the report suggests it should be implemented “as soon as practicable”.
As indicated in the chancellor’s Mansion House speech, the Treasury intends to apply this loan to income threshold to all lending under the Help to Buy mortgage guarantee scheme.
There has been much market commentary about a housing bubble, particularly in London and the South East. As a result, the state-owned banks, Royal Bank of Scotland and Lloyds, recently announced that they will limit Londoner’s loans to incomes for £500,000+ homes.
The report also recommends mortgage lenders should apply an interest rate stress test. The test would assess whether borrowers could still afford their mortgages if at any point over the first five years of the loan the bank rate were to be 3 per cent higher than the previous rate.
The FCA said: “Our mortgage rules require firms to have regard to FPC recommendations on stress test levels. We expect lenders to have regard to what the FPC has said today.”
