The limit will apply to the number of mortgages completed. While rules will not come into force until 1 October 2014, mortgage offers made or decisions in principle taken before the proposed rule comes into effect but which complete after 1 October 2014 will count towards the limit. The PRA will apply a minimum threshold which will mean that the limit will not apply to firms which report less than £100m of new mortgage lending annually. This will be assessed on a rolling basis.
The report said:
“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable.”
The PRA Board is today setting out proposals on how the recommendation will be implemented. A consultation paper has been published today and will be open for comments until 31 August 2014. Final rules will come into effect on 1 October 2014.
The Bank said that the plans would not have an immediate effect on the current housing market, and would not suddenly harm a buyer's ability to get on the property ladder.
Bank of England Governor Mark Carney said:
"These actions will have a minimal impact in the future if, and it is an important if, if the housing market evolves in line with the bank's central view."
"The 15% cap ... could quickly become relevant if house prices grow more than we expect, if incomes grow less rapidly than we expect, or if underwriting standards slip."
Andy Caton, Yorkshire Building Society Group’s Chief Corporate Affairs and Treasury Officer and Executive Director, said:
“We are pleased to see the Bank of England taking a sensible approach to limiting the chances that the current recovery in the housing market may turn into a future bubble.
“We would have had concerns about the introduction of a blanket loan-to-income cap on new lending, which would have been a very blunt tool, and could have locked out those people who are trying to get on the housing ladder and are genuinely in a position to take on a mortgage at a relatively high multiple of their earnings.
“As a responsible mutual lender we take into account a wide number of considerations about any applicant’s ability to afford a loan; not just how much they earn.
“The report’s recommendation on stress testing will not affect us as our responsible approach already sees us assess borrowers’ ability to repay if rates were to increase substantially.”
