“So I suspect that lenders are coming close to that limit, but not necessarily completely at it. You need to make sure that you've got a sustainable mortgage offering throughout the year.
“So what you wouldn't do is an awful lot of high loan-to-income lending in the first half of the year, and then tie yourself up for the second half of the year. There’s always a regulatory cushion within that regulatory perimeter.”
Jordan at Nationwide confirms that lenders would leave “a bit of a buffer”.
“This is one of the pushbacks I think people get when they say the 15 per cent limit is too tight,” he adds. “The argument is, generally, you're not fully using 15 per cent currently.
“Part of that would be, it’s a very hard regulatory cap; no lender would want to go past that, so you have to leave some buffer to manage that position.
“And it's not something that is particularly easy to control. You have to make quite big changes and there’s quite a big pipeline of lending, particularly after six months. You have to factor that in, so that’s why buffers would be used.”
Historic issues
And the problems were clear even before the latest cost of living crisis.
In November 2016, the Prudential Regulation Authority noted in a consultation paper that the former, fixed quarterly nature of the LTI flow limit could make it harder for some firms to manage their business pipeline.
The regulator amended its rules in February 2017 following consultation, so that the LTI flow limit is applied on a four-quarter rolling basis.
According to the PRA, respondents agreed that the change was likely to allow firms to manage the limit more effectively, reducing the potential need for sharp changes in lending as a result of the limit.
But managing the LTI flow limit can still be an issue for lenders.
“If you've seen, let’s say, a disproportionate number of customers above 4.5 times, you then have to restrict it for the rest of the year to make sure you remain within your limit,” says Merritt at Yorkshire Building Society.
“And what that means is you end up saying no to customers that represent good credit quality, have a high level of affordability. You’ve got an appetite to lend to them, but the regulation dictates that you've already seen too much of that type of lending, and so it requires you to pull back.”
Like Nationwide, others in the mortgage industry have called for a review of the LTI flow limit.
The Intermediary Mortgage Lenders Association published a report in September 2022 saying the FCA’s affordability requirements were sufficient to ensure the mortgage market does not become a source of financial instability.
