IMLA executive director Kate Davies likewise says that the LTI flow limit is a third lower when put into practice. “If the regulator wants to limit lenders’ exposure, 15 per cent is not the right place,” she says.
While the trade association does not collect data from members, Davies says that anecdotally, lenders have conveyed that they would cut out lending at 4.5 times income or above at a threshold of approximately 10 or 11 per cent.
“If the intention had been to cap it at 15 per cent, actually, we should probably put it somewhere nearer 20,” says Davies.
“And if you have a limit like that, inevitably some lenders are not going to concentrate on giving loans of 4.5 times salary-plus to first-time buyers, whose loans are going to be relatively low.
"They're going to concentrate on people who are earning much more and who are, by definition, not going to be first-time buyers.”
Indeed, IMLA’s report argues that rationing high LTI mortgages hits first-time buyers and lower-income households hardest.
FCA findings
An occasional paper from the Financial Conduct Authority, on changes in the mortgage market after the LTI flow limit was implemented, also found an increase in the average loan size and a decrease in the proportion of first-time buyers for high LTI mortgages.
The paper said this raised a question of whether the redistribution consequences could be mitigated if the 15 per cent limit was instead set on the value of sales. The LTI flow limit currently limits the number of mortgages extended at high LTI ratios.
Higher loan amounts may be more profitable for lenders at the expense of first-time buyers, but an alternative of limiting the value of mortgages extended at LTI ratios of at least 4.5 may not necessarily be a better solution.
“The challenge with that is it depends on the lender’s strategy, and the segments of the market that you operate in,” says Yorkshire Building Society’s director of mortgages, Ben Merritt.
“So let's say you're a lender that operates predominantly in London and the South East, then you would find that the utilisation of a value metric would be absorbed really quickly."
He warns that, if you’re a private bank and you have high-net-worth clients, you would hit that really quickly.
According to Merritt: “There's pros and cons both ways, but I think that that would drive outcomes that wouldn't necessarily be the right outcomes.
"If you've got a number of high-value cases coming through, it reduces your ability to help more first-time buyers.”
Like IMLA, the Building Societies Association’s report also notes how people without family help or on single and lower incomes have been excluded from home ownership. It recommends, among other things, a review of the LTI flow limit to focus on first-time buyer support.
