The BSA’s report says that while the 15 per cent cap on lending above 4.5 times income may be less relevant today given higher mortgage rates, an immediate review should be undertaken to assess whether it would be beneficial to adjust the limit and to target mortgages above the cap at first-time buyers.
“I think a larger proportion of the lending is required to be focused on first-time buyers,” says the BSA’s head of mortgages and housing, Paul Broadhead.
Using a higher LTI flow limit of 20 per cent as an example, he suggests requiring half of that limit to be allocated to first-time buyers, thereby enabling lenders to continue lending higher income multiples to higher earners.
“I don't think that first-time buyers should be disadvantaged if, on every other metric, they can afford the monthly payment,” says Broadhead. “Because we still have the affordability calculation, we still have the stress test; so we know they can afford it.”
No scope for change
But Stephen Millard, deputy director at the National Institute of Economic and Social Research, and who previously worked at the Bank of England, says he thinks there is “basically no scope” for the FPC to consider raising the LTI flow limit to help first-time buyers.
“There are at least three reasons for this. First, it could be argued that allowing households to borrow at well in excess of four times their income, particularly in the US, was one of the causes of the global financial crisis.
“Second, with higher interest rates, it would seem even more risky to grant loans at high LTI ratios given that this would imply higher debt service ratios than at the time the original flow limit was set.
“Third, imposing strict LTI limits insulates the real economy from shocks in the housing market by delinking house prices and household borrowing.”
The withdrawal of the FPC’s affordability test recommendation in August 2022 has also reduced the chances of the LTI flow limit being adjusted, says Millard. “These two policies are both aimed at the same risk: that household incomes are not high enough to cover mortgage payments.
“Take one away and you are just left with one tool for tackling this risk, leaving you highly unlikely to reduce that tool’s effectiveness.”
While not sure what might cause the FPC to loosen the flow limit, Millard says that “maybe the answer would be to allow banks to go beyond the flow limit if they were prepared to put up extra capital against the additional mortgages.
