"That is, attach a higher ‘risk weight’ to mortgages beyond an LTI of 4.5 than to other mortgages."
The LTI flow limit: a ‘blunt’ tool?
Another argument that has been made about the LTI flow limit is that it is a blunt measure.
According to the minutes of a roundtable hosted by the All-Party Parliamentary Group for Challenger Banks and Building Societies in December 2022, Yorkshire Building Society’s chief commercial officer, David Morris, “agreed that LTI was a blunt instrument”.
Merritt, the building society’s director of mortgages, says: “I think our position on this is, we want to lend to customers that have got the financial means to repay the loan, and can demonstrate that now and in the future.
“The way we determine that is through our affordability model; that's where the sophistication lies. And that's how we assess whether or not people are overextending themselves.
“And that's why I think we've talked about the LTI measure being a bit blunt, because it doesn't take some of the nuance of that, and the sophistication of the affordability model… I think the question for me is, is an LTI cap needed if lenders have robust and sophisticated affordability models?”
IMLA’s report likewise points to the strength of affordability testing. It says: "The FPC refers to the LTI flow limit as a guardrail against the excess build-up of household debt and rise in the number of highly indebted households.
But in a period when house prices are rising faster than incomes, the FCA affordability test acts as an automatic brake on over-indebtedness, because it ensures that every mortgage that is granted for house purchase is affordable for the borrower at the point it is taken out."
“It's clear that the regulators need to make sure that lenders don't overexpose themselves, but the affordability rules brought in by [the Financial Conduct Authority's Mortgages and Home Finance: Conduct of Business Sourcebook] are still there in spades,” says Davies at IMLA.
“And from the lender’s point of view, they have already assessed these people. They have assessed that they can afford to repay the loan; they meet all the MCOB requirements, and the lender’s own affordability requirements, lending and risk appetites.”
Of Yorkshire Building Society’s affordability model, for example, Merritt says: “We have a sophisticated model which looks at income, expenditure, it brings in external data... from the Office for National Statistics. And we can make high-quality lending decisions based on what that model is telling us.
“That LTI cap then removes our ability to make high-quality decisions, because it applies a static cap regardless of the economic environment. So what you're doing is replacing a sophisticated approach with quite a simple measure.
