Mortgages targeted at first-time buyers often focus on raising a deposit as a barrier to home ownership.
But loan-to-value is just one aspect of lending criteria, with macroprudential regulation limiting the amount most borrowers can borrow to a maximum of 4.49 times their income.
In June 2014 the Bank of England’s Financial Policy Committee made a regulatory recommendation restricting the number of mortgages extended at loan-to-income ratios of 4.5 or more to 15 per cent of a lender’s new residential mortgage lending.
A consultation paper from the Prudential Regulation Authority at the time noted that a recovery in the UK housing market had been associated with a “marked rise” in the share of mortgages extended at high loan-to-income multiples.
“Increased household indebtedness may be associated with a higher probability of household distress, which can cause sharp falls in consumer spending,” the paper read.
“Falls in consumption can in turn weigh on wider economic activity, increasing macroeconomic volatility in the face of shocks to income and interest rates.
“Furthermore, rapid growth in aggregate credit – which could be associated with a sharp increase in highly indebted households – is strongly associated with subsequent economic instability and the risk of financial crisis.
“Acting against excessive indebtedness will make the financial system more stable and will reduce the direct and indirect impacts on the firms that the PRA regulates. A more stable economy and financial system will thus help advance the PRA’s objective of promoting the safety and soundness of firms.”
Compromise
A report for the Building Societies Association, published in April, acknowledges that an “important balance” is the compromise between financial stability and first-time-buyer numbers.
But it adds that the last decade has seen the balance tilted in favour of financial stability, with the inevitable cost that many have been excluded from home ownership. “It is now time to debate the costs and benefits of the current approach,” the report argues.
One possible option would be to raise the maximum LTI flow limit from 15 per cent.
According to a separate report by the Intermediary Mortgage Lenders Association published in September 2022, a number of lenders informed the trade association that they need to constrain the proportion of mortgages at an LTI of 4.5 or above to “well below” 15 per cent.
Lenders’ pipeline of new business can be unpredictable, and they need to leave significant headroom to allow for unexpected changes to avoid the risk of exceeding the flow limit, IMLA says.
The Bank of England’s financial stability report, published in December 2023, shows that the share of new mortgages with LTI ratios of at least 4.5 peaked at just over 10 per cent since January 2022.
