Brokers have warned that a conflict between the Mortgage Market Review and the Bank of England’s loan-to-income cap risks creating “mass confusion” for borrowers.
Last month, the Bank moved to reduce the risk of people over-borrowing when it announced no more than 15 per cent of new mortgage lending could be above 4.5 times the borrower’s income.
This came just two months after the implementation of the MMR, which puts the focus on a wide range of affordability checks, not just LTI ratios.
Lenders’ criteria changes
While the LTI cap does not come into force until October, Santander and Nationwide have already made changes to their lending criteria by applying a blanket LTI limit across all residential lending.
Santander has capped LTIs at five times income for all residential applicants while Nationwide has introduced a limit of 4.75 times income and increased its stress-test rate to 6.99 per cent. Both Lloyds Banking Group and Royal Bank of Scotland have capped multiples at four times income for loans above £500,000.
Brokers argue the changes are a step in the wrong direction.
John Charcol senior technical manager Ray Boulger says: “If you start on the premise that credit scores have some value when it comes to assessing borrowers – which the FCA and lenders clearly have believed historically – it seems illogical to apply a blanket income multiple, regardless of the applicant.
“Effectively it will reduce the aver-age quality of the lender’s book. Previously, an applicant with a good credit score could get perhaps 5.5 or six times income with Santander but they will now be capped at five times.
“On the other hand, someone who would previously be capped at four times income could potentially borrow more.”
Perception Finance managing director David Sheppard says: “There are borrowers with a good credit history and decent incomes who will not be able to borrow as much as before, which is a negative outcome from this.
“I don’t think that is what the regulator was intending to happen. It was trying to say that all lending carried out at the higher end of the LTI scale must be done diligently.”
Coreco director Andrew Montlake argues the Bank’s LTI cap goes against the grain of the MMR.
“There is always a potential that some people will lose out as a result of policy changes like the ones we’ve seen from Santander and Nationwide,” he says.
“For me, the whole point of the MMR was to move away from income multiples. If the mortgage is affordable now and against a stress-test rate, why does it matter that the loan is over 4.5 or five times income?”
Boulger agrees there is a tension between the MMR and capping income multiples.
“We have one regulator telling lenders they have to base lending on affordability, which a lot of people will say is good sense,” he says. “But now we have the Bank of England reintroducing the income multiple assessment so in that case you have to ask what the point of the MMR was. These changes seem to make the MMR redundant.”
Brokers say regulatory uncertainty has contributed to the recent tightening of lending criteria.
Sheppard says: “In fairness to lenders, all they want is some degree of certainty and they are not going to have that while they are getting different messages from different outlets. The FCA is now looking at consumer outcomes but that cannot have a standardised approach.
“It is irresponsible regulation because lenders need one voice giving all the instructions at one time. Constantly shooting new rules from different angles only leaves lenders and consumers confused.”
An FCA spokeswoman insists the two policies are not inconsistent. She says: “Lenders must be assessing the affordability for each mortgage before they agree to make the loan.
“The LTI limits apply in aggregate so lenders should be considering the LTI threshold limit across all their lending rather than on an individual basis.”
However, Boulger argues that to maintain an aggregated LTI, lenders will have to focus on individual borrowers.
“The LTI limits applied by the Prudential Regulation Authority may be set on an aggregated basis but obviously to enforce that, lenders will have to look at LTIs on an individual basis just as the MMR insists with affordability,” he says.
Montlake adds: “The problem is all these changes from the regulators and lenders add up to mass confusion for the customer. It’s all very well to point fingers and say who is right and whois wrong but at the end of it all the consumer has no idea what is going on.”
|Lloyds Banking Group||4x (for loans above £500,000)|
|Royal Bank of Scotland||4x (for loans above £500,000)|
|Barclays||Up to 5.5x (dependent on borrower circumstances)|