The Prudential Regulation Authority (PRA) has announced that is reviewing loan to income (LTI) ratio requirements and, while the review is underway, will allow lenders, under certain conditions, to temporarily disregard the existing cap.
At present, mortgage lenders must ensure that no more than 15% of their new residential mortgages each year have an LTI ratio of 4.5 or higher. However, the Bank of England’s Financial Policy Committee (FPC) has asked the PRA and the FCA to reconsider how this limit is applied.
The proposed change would allow individual lenders to exceed the 15% threshold, provided that the total level of high LTI lending across the entire market remains broadly unchanged.
The FPC recognises that this could mean some lenders will individually surpass the 15% limit while the overall market stays within bounds. In light of this, the PRA is reviewing the LTI ratio requirements.
While this review is ongoing the PRA is offering a 'modification by consent' that will allow lenders to disapply the 15% limit with immediate effect.
During the review period, lenders may opt to lift the 15% restriction immediately, as long as they agree to certain conditions. These include informing the PRA of any significant changes to their business plans — such as how much high LTI lending they expect to do each quarter for the next year — and explaining any adjustments to their risk appetite and risk management approach.
Participating lenders must provide this information within one month of opting into the temporary arrangement and submit monthly updates showing their levels of high LTI lending. The first report must cover the previous three months.
This temporary measure will remain in place until 30 June 2026, unless the PRA concludes its review and introduces revised rules before then.
The PRA says it will consult 'in due course' on changes to the LTI flow limit requirement and can revoke the modification or make a revised one available at any time.
The latest announcement follows yesterday's confirmation that the LTI flow limit will only apply to lenders that extend residential mortgages with a total value of above £150 million a year, rather than the £100 million threshold set in 2014.
Dame Debbie Crosbie, Nationwide’s CEO, commented: “This is good news for first-time buyers, and is also a boost to the UK’s housebuilding ambition and the wider economy. We have long argued that relaxing this regulatory restriction will provide confidence to both lenders and housebuilders without materially increasing risks.
“It will help people who struggle to get on the property ladder because high rents and living costs have made saving for a deposit and meeting mortgage affordability tests extremely challenging.
“This is a welcome move and a strong signal that Government and regulators are working together to boost economic growth and competitiveness.”
Paul Broadhead, head of mortgages and housing at the BSA, said: "The Building Societies Association (BSA) welcomes today’s news that following the FPC's recommendation, the PRA is reviewing the Loan to Income (LTI) flow limit rule. This is a step in the right direction, and will enable more first-time buyers that can demonstrate affordability to access home ownership. Individual firms, including building societies will have immediate flexibility to lend to more borrowers without increasing the overall risks in the financial system.
"We have been calling for an uplift in the FPC LTI flow limits for some time and it is likely that today's announcement will deliver meaningful benefits to aspiring homeowners and in turn, help stimulate economic growth.
"We look forward to continuing to work with regulators and government to review mortgage regulation to ensure that we have a market that is innovative, fit for the future and maintains consumer protection at its heart."
