PRA introduces rolling LTI flow limit for mortgage lenders
The fixed quarterly nature of the LTI flow limit can affect firms’ ability to manage their business pipeline, as lenders can generally control mortgage approvals, but not completions.
The Prudential Regulation Authority is amending the rules on loan-to-income ratios in mortgage lending to allow firms to accommodate fluctuations and peaks in demand for high LTI mortgages.
From June 2014, mortgage lenders have had to limit the number of new residential mortgage loans made with an LTI ratio at, or greater than, 4.5 to no more than 15% of their total number of new mortgage loans.
The PRA says the current fixed quarterly nature of the LTI flow limit could make it harder for some firms to manage their business pipeline.
It therefore plans to change the current fixed quarterly limit into a four-quarter rolling limit, starting from Q1 2017.
Under the plans, the limit would still need to be complied with and monitored at the end of every quarter, but the relevant flows of loans for compliance with the limit would now be those during a rolling period of four quarters in total, instead of one quarter as currently applied. These four quarters refer to the immediate quarter under consideration and the three quarters preceding it
This would mean that starting from Q1 2017 the PRA would monitor the LTI flow limit on a four-quarter rolling basis, which for Q1 2017 would be incorporating data on flows from Q2 2016, Q3 2016, Q4 2016 and Q1 2017.
In its consultation paper, the PRA said: "The LTI limit was first implemented on a quarterly basis due to data quality concerns and to aid the monitoring of the limit. However, the fixed quarterly nature of the LTI flow limit can affect firms’ ability to manage their business pipeline, as lenders can generally control mortgage approvals, but not completions. In addition, the seasonal nature of the mortgage market could create difficulties for firms, particularly for smaller lenders. Given improvements in data availability and quality the PRA considers it is appropriate to change the LTI limit so it operates on a four-quarter rolling basis."
The PRA says that as the change allows firms to smooth seasonal fluctuations in demand and facilitate forward-planning of mortgage pipelines, they will be less likely toinadvertently breach the limit.
In addition, to the extent that smaller firms may be more likely to experience large fluctuations in demand, the change to a rolling limit may reduce the burden on smaller firms and hence facilitate effective competition in the market.
The PRA also confirmed that interest roll-up bridging loans and mortgages ‘ported’ to another property will continue to be excluded from the LTI flow limit.