New framework for high loan-to-income mortgage lending proposed

The Prudential Regulation Authority (PRA) is required by the Financial Services and Markets Act 2000 (FSMA) to publish a cost-benefit analysis (CBA) for its proposed rules.

These proposals, developed jointly with the Financial Conduct Authority (FCA), aim to change the current high loan-to-income (LTI) flow limit.

Currently, a firm's high LTI lending cannot exceed 15 percent of its total new lending.

The new framework would allow individual firms to exceed this 15 percent limit if the aggregate market flow of high LTI lending remains below the Financial Policy Committee's (FPC) 15 percent limit.

This introduces flexibility but requires firms to adjust if the aggregate limit is approached.

The PRA's CBA Panel provided feedback, leading to considerations on competition impacts, historical lending volatility, and firms' resilience.

The PRA anticipates net benefits to the UK financial market from these proposals.

Direct marginal costs will apply to the PRA for publishing aggregate LTI measures and increased supervisory monitoring, particularly for firms exceeding the 15 percent threshold.

Firms choosing to exceed the 15 percent limit will incur costs related to monitoring the aggregate measure and adjusting their lending if necessary.

However, direct benefits include reduced compliance costs and increased lending opportunities for firms.

This is expected to foster greater market competition and increase the supply of high LTI mortgages for creditworthy individuals.

The current policy, introduced in 2014, has annually affected around 43 firms, which collectively issue approximately 850,000 new residential mortgages, representing about 99 percent of the total market.