The average loan size for high loan-to-income (LTI) mortgages increased by between 4 and 7% post-implementation of the LTI flow limit according to a new paper by Adiya Belgibayeva at the FCA.
In July 2014, the Financial Policy Committee (FPC) recommended that the FCA and PRA “ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at LTI ratios at or greater than 4.5%”.
The recommendation took effect on 1 October 2014 and applies to the number of mortgages, not the value.
The recommendation changed in January 2017 to accommodate seasonality.
This rise suggests that lenders migrated towards borrowers with higher incomes.
Above the 4.5% FPC cut-off there is reportedly an increase in the proportion of home movers and joint income applicants but a decrease in the proportion of first-time buyers.
According to the Financial Stability Report in November 2016, since the implementation of the recommendation, the allocation of credit across LTI ratios has changed.
The paper, which can be viewed here, aims to look at the changes in consumer outcomes and lenders’ market dynamics in response to the recommendation.
The report has found evidence that high LTI mortgages have been shifted towards the regions with higher average income and house prices.
However the price for high LTI mortgages on average decreased post-implementation.
The paper also found that lenders who have been closer to the flow limit reduced mortgage price on higher LTV lending by more.
Before the recommendation, lenders’ exposures to high LTI mortgages varied.
Belgibayeva is a senior associate in the economics department at the FCA.