Finding the golden ratio for loan to income mortgages

Finding the golden ratio for loan to income mortgages
Financial Services analysis: Will restricting the number of high loan to income (LTI) mortgages help stabilise the economy and the financial system? Richard Waller, head of financial services at TLT, comments on the recommendations made by the Financial Policy Committee (FPC).

Original news

Consultation: Implementing the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending—CP11/14, LNB News 26/06/2014

Mortgage lenders should not extend more than 15% of their total number of new residential mortgages at LTI ratios at or greater than 4.5, the FPC has recommended. In response, the Prudential Regulation Authority (PRA) board is consulting on proposals to implement this recommendation. The consultation is open until 31 August 2014, with the final rules expected to take effect on 1 October 2014.

What is the background and purpose of the PRA’s proposals?

The Bank of England’s FPC is responsible for protecting and enhancing the resilience of the UK financial system. It makes recommendations to the PRA to mitigate risk to the financial system.

The FPC has identified that economic stability is being threatened by increased household indebtedness. This has been brought about by a sharp rise in the number of high LTI multiples. The FPC has therefore recommended to the PRA that the number of high LTI mortgages should be restricted.

What are the proposals in this consultation?

New residential mortgages with an LTI ratio of 4.5 are to be restricte

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.