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Amendments to the PRA’s rules on loan to income ratios in mortgage lending - consultation

Last updated: 2 Dec 2016

Consulting body:
Prudential Regulation Authority
Period of consultation:
Runs from 30 November 2016 to 10 January 2017
CML action:
Response submitted

We have requested that the Prudential Regulation Authority (PRA) review the operation of the Loan-to-income (LTI) ratio limits, emphasising members' difficultly with managing business flow given the quarterly limit and are pleased that the PRA have responded to our request. They have now proposed a quarterly rolling limit: full details including worked examples are included in the consultation paper CP44/16.

CML response

The CML has voiced concerns over the effect the LTI limits on mortgage lending, introduced in 2014, has on the operations of firms within the residential mortgage market. Calculating the LTI flow limit on a quarterly basis compromises lenders’ ability to manage their business pipeline and this is exacerbated by the seasonal nature of residential mortgage lending.

We therefore welcome the proposed change so that the limit will now operate on a four-quarter rolling basis.

We agree that the clarification regarding interest roll-up bridging loans and mortgages ‘ported’ to another property is useful to market participants.

In addition, we would like clarification as to whether the calculation of income used in the regulatory LTI limit should be:

a) all gross income the customer has declared as part of the mortgage application, or

b) the ‘allowable’ gross income following haircuts made to income types such as bonus.

While noting the comments in the last Financial Stability Report, we continue to request that the Financial Policy Committee (FPC) reviews the calculation of the rate used to stress test residential mortgages.

Given the likely path of interest rates, we continue to believe that the existing calculated rate is excessively conservative and places an unnecessary restriction on the growth of the residential mortgage market.

The full CML response to this consultation can be downloaded below.