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Home > Prudential Regulation Authority > Amendments to the PRA’s rules on loan to income ratios in mortgage lending – CP44/16
 

Amendments to the PRA’s rules on loan to income ratios in mortgage lending – CP44/16

30 November 2016

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed amendments to the Housing Part of the PRA Rulebook in respect of the Financial Policy Committee’s (FPC) Recommendation on loan to income (LTI) ratios in mortgage lending in the owner occupied market. The CP also provides additional clarification regarding the scope of the LTI policy. 

The FPC’s Recommendation in June 2014 was addressed to the PRA and the Financial Conduct Authority (FCA) (‘the regulators’). It asked the regulators to ensure that mortgage lenders limit the number of new residential mortgage loans made with an LTI ratio at, or greater than, 4.5 to no more than 15% of their total number of new mortgage loans.

Since the FPC’s Recommendation the PRA has continuously reviewed the implementation of the LTI flow limit. The implementation of the LTI flow limit has not raised significant implementation challenges for firms. However, the current fixed quarterly nature of the LTI flow limit could make it harder for some firms to manage their business pipeline. 

Summary of Proposals

This CP proposes to amend the PRA’s rules to change the current fixed quarterly limit into a four-quarter rolling limit. In addition, this CP contains additional clarification on the scope of the LTI flow limit regarding interest roll-up bridging loans and mortgages ‘ported’ to another property where there is no increase in the principal outstanding. The PRA will continue to work together with the FCA to monitor developments relevant to the LTI flow limit.

In addition, as outlined in the November 2016 Financial Stability Report (FSR), the FPC reviews its Recommendations on a regular basis to assess whether they remain appropriate. In concluding the 2016 review of its housing recommendations, the FPC has agreed to maintain the LTI flow limit recommendation at its current calibration.

Implementation/ Response

The PRA is proposing that the change to the rules takes effect as soon as practical, with the aim that the first quarter in which the four-quarterly rolling limit would apply would be Q1 2017, subject to the responses to the CP. This would mean that starting from Q1 2017 the PRA would monitor the LTI flow limit on a four-quarter rolling basis, which for Q1 2017 would be incorporating data on flows from Q2 2016, Q3 2016, Q4 2016 and Q1 2017. It is important to note that compliance under a fixed quarterly limit (which is the current expectation) automatically implies compliance with the limit under a four-quarter rolling basis. 

Since the proposal does not represent a significant change from the existing policy position and gives firms additional flexibility to comply with the limit, the consultation period will be six weeks. This will allow for a swifter implementation of the change, subject to comments received.

This consultation closed on Tuesday 10 January 2017. Please address any comments or enquiries to CP44_16@bankofengland.co.uk.

Consultation paper

Amendments to the PRA’s rules on loan to income ratios in mortgage lending – CP44/16

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