Number of High Loan to Income Multiple Mortgages to Increase

After the credit crunch crisis in 2007/2008, causing many banks to collapse in the US and then across the UK and Europe and needing capital bail outs by respective governments.

The mortgage market had been overheating for around 20 years, with lenders taking ever increasing risks, offering mortgages to people with poor credit histories, lending too much money to those that may not be able to afford it with no deposit required 100% loan to value mortgages, some lenders offering 9 and 10 times multiples of income mortgages and others even offering ‘self certification’ mortgages where you did not even have to prove your income, you simple signed to self certify that you earned £50,000, £75,000, £100,000 and more.

Needless to say, ‘toxic debt’ was born with many borrowers getting into difficulty, repossessions and lenders struggling with low cash flow and in possession of illiquid property.

Mortgage Market Review:  MMR

After the crisis, the Prudential Regulation Authority (part of the Bank of England) that supervises UK licenced banks to ensure financial strength and capital adequacy alongside the Financial Conduct Authority, that regulates mortgages products, lending and sales, set a limit for mortgage lenders that a maximum cap of 15% of total new mortgage lending per annum could be made to borrowers with a loan to income (LTI) ratio of 4.5 x income or more.

Review of LTI Cap

The PRA and FCA have recognised that this LTI cap needs updating in that it is restricted for all lenders to 15% of new lending per annum.  This restricts the mortgage market in that some lenders, that have a low LTI mortgage book, can be restricted in entering and making a difference to the high LTI market in that they were restricted to 15% of total new lending, which if they already have a lending book £billions of low LTI mortgages, even if they only offered high LTI loans for the coming year, it would still only be a small % of total their lending.

Comment

It seems a reasonable move to allow each individual mortgage lender to have up to 15% of their total lending ‘book’ with high LTI (4.5 x income and higher) loans rather than restrict it to 15% of all new mortgage lending per annum.

This will allow more lenders to offer more ‘high LTI’ loans and indeed may encourage smaller lenders to enter the market.  If a small, provincial building society usually only completes 100 mortgage loans per year, then at a 15% pa of new lending, this would mean a cap of just 15 high LTI mortgages per annum but, with the cap changed to 15% of overall lending book, then the small lender could enter the high LTI and offer 100 high LTI this year alone.

That said, we fear that a return to mass ‘high LTI’ lending could mean the return of ‘toxic’ debt and another credit crunch crisis.