Smaller lenders that advance less than 300 mortgages a year or that engage in mortgage lending worth less than £100m will not have to comply with a new earnings multiple cap that is being applied across the market, the Bank of England has confirmed.
Lenders must ensure that higher loan to income multiples of 4.5x do not make up more than 15 per cent of their mortgage book, under recommendations from the Bank’s Financial Policy Committee in June that have been confirmed by the Prudential Regulation Authority today.
In response to a public consultation, which closed at the end of August, the PRA stated that firm could allocate any part of the allowance to members of its group, but must ensure that the overall proportion of this higher value lending remains within the limit.
Several responses to the consultation brought up the impact of the proposed policy on niche lenders. The PRA proposed a £100m ‘value de minimis’ threshold to ensure the loan-to-income limit does not have a disproportionate effect on narrow segments of the market.
The PRA stated that it considers that it is appropriate to extend the de minimis threshold to apply on either a value or volume of lending basis. This means that lenders who lend less than £100m in value or fewer than 300 in number of relevant regulated mortgage contracts each year fall outside the scope of the policy.
On 26 June the FPC published a report recommending that 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, adding that no more than 15 per cent of a lender’s book can account for such high loan-to-income multiples.
The Financial Conduct Authority responded with some general guidance to help firms fulfil the BoE’s mortgage income multiple cap recommendations.
Although the limit will not apply to firms below the threshold the PRA will monitor the proportion of lending at high earnings multiples by these firms.
In terms of the changes impact, the PRA stated that they will result in the loan to income policy applying to fewer institutions than considered in the cost benefit analysis and results in a reduction of the costs of the policy.
The PRA added it will keep the operation of the policy under review as part of its normal functions.
The Council of Mortgage Lenders’ submission to the PRA’s consultation pointed out that the existing recommendations would severely affect the ability of lenders to provide mortgages to high net worth clients.
“The affordability of high net worth clients’ mortgages is often based on assets as well as income. Therefore, these customers can often have relatively high LTI ratios even though there is no issue with affordability.
“Lenders that have a high proportion of HNW customers may, therefore, regularly have more than 15 per cent of their business at above 4.5-times LTI.”
