"An increase in the average loan size suggests that lenders migrated towards borrowers with higher incomes."
In June 2014 the Financial Policy Committee recommended that the FCA "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".
The regulations aim to limit the risk of excessive lending and reduce risks of financial instability. The LTI flow limit took effect in October 2014 and applies to lenders that extend residential mortgage lending greater than £100 million per year.
The FCA's latest research paper shows that lenders increased the number of new mortgages at LTI ratios just below 4.5 and restricted lending at LTI ratios above 4.5, resulted in ‘bunching’ below the 4.5 cut-off.
The research also found that the rules have incentivised lenders to extend high-LTI mortgages on bigger loans to maintain interest income and the total value of new mortgages.
The FCA's figures support this, showing that the average loan size for high-LTI mortgages increased by 4-7% after the new limits were implemented. An increase in the average loan size suggests that lenders migrated towards borrowers with higher incomes.
Above the 4.5 cut off, there has also been a decrease in the proportion of first-time buyers and a rise in the number of home movers and joint income applicants, who are more likely to have higher incomes.
