August 6th, 2014
The Financial Conduct Authority has now released the process required for all mortgage lenders to follow when assessing the loan-to-income ratio for all mortgage cases. As the press release confirms, the outline has been provided in tandem with the recent Financial Policy Committees request to the Government for rigorous restrictions on the way lenders consider each individual mortgage case for lending, with particular focus on the income multiple to debt ratio assessment.
The release outlines that, ‘the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable.’
The guidance also makes it unequivocally clear that the regulator will use the new powers granted by the Government to stem irresponsible or reckless lending, as it states:‘We may, on our own initiative, require the firm to stop entering into high LTI mortgage contracts.'
The regulations will take effect from 1st October this year, with the expectation being that the cap on high income multiple lending should have a positive impact on curbing ever-increasing property values across the UK. Simon Butler, of Contractor Mortgages Made Easy, commented: “At present no lender in the UK is near enough to the 15% limit set by the FCA to be concerned, but contractors looking to purchase in London should be aware that this could have a long term impact on their plans.
“As prices do not appear to be slowing down in the capital, higher lending multiples are often required to meet the margins necessary to complete a purchase. But if lenders edge closer to the new cap being imposed, lending options may become sparse while the market goes through a period of adjustment.”
Many market commentators will keep a close eye on the impact of the guidance, with the International Monetary Fund particularly quick to warn that alternative methods should be incorporated to manage the markets, if limiting lending limits does not help. The IMF took the opportunity to comment on the management of the UK markets, and chose to also warn the Governor of the Bank of England, Mark Carney, that any warning signs that the market was in trouble should be met with an interest rate rise to stem the tide.
The IMF claimed that rising house prices and the increasing level of borrowing required to purchase would leave UK households “vulnerable to negative income and interest rate shocks,” and that if the lending guidance did not cool the market to a manageable level, alternative methods should be implemented. On that note, the IMF stated, “If these policy measures prove to be insufficient, then the Bank of England might want to consider an interest rate hike to tighten financial conditions.”
Article By: Jon Sheilds, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080