Brokers are palpably frustrated by the Bank’s loan limit, say lending exec
Hundreds of thousands of potential first-time buyers are being denied the chance to get on to the property ladder because of a restrictive Bank of England recommendation on how much lenders can loan, according to an executive at Gen H.
Peter Dockar (pictured), chief commercial officer at the fintech mortgage lender, is urging the Bank of England’s Financial Policy Committee to ease its loan to income (LTI) flow limit, which sets a threshold for the maximum LTI ratio that lenders can use when approving new residential mortgages. It is essentially designed to promote responsible lending practices and protect borrowers from taking on too much debt.
Crucially, the LTI flow limit stipulates that no more than 15% of a lender’s new residential mortgages can have LTI ratios at or greater than 4.5 times the borrower’s income. Dockar believes this is unfair, not only to lenders but also, importantly, to prospective first-time buyers, whom he suggests are missing out on homeownership when a lender reaches their limit.
“The house price income ratios from the demand side remain really challenging,” Dockar told Mortgage Introducer. “There are typically about 300,000 first-time buyers in a given year. If we look at the population growth over the past 20 years, we should probably be looking at more like half a million - that's what we should be seeing. So every year there's a gap of a couple of hundred thousand first-time buyers. In addressing the demand side, it's all about unlocking affordability. The fundamental block for many lenders, I would argue, has been the LTI flow limit. It's a very blunt measure of credit risk.”
Dockar also views the 4.5 ratio as ‘somewhat arbitrary’. “To make the numbers easy,” he explained, “If I earn £10,000, and I want to borrow £44,000, that's deemed low risk. If I want to borrow £46,000, that's deemed high risk. We should remove the rationing of LTIs I think. It is entirely constraining first time buyers from accessing the finance that they can affordably justify. If house prices are eight to one and you're rationing income multiples to four-and-a-half to one, lenders are not going to be able to support the demand side of it. They would like to support more borrowers.”
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How does the LTI flow limit affect brokers?
As an intermediary-only lender, Gen H knows how frustrated mortgage advisers are by the restrictive policy, Dockar suggests. “We see brokers’ frustration when they’re seeing really good cases, where a customer can clearly demonstrate affordability and clearly demonstrate that they're on a good income trajectory,” he said. “To make the most of the limits, lenders ration high LTI cases to higher earners - often those earning more than £50,000. Nationwide has been moving the minimum income for its first-time buyer fixed mortgage, Helping Hand, up and down over recent months to manage the limit. The frustration is palpable that good deserving cases fail to access the lending they need. And as a prospective borrower, being ruled out because I'm number 16 out of 100 not number 14 out of 100, which is what the 15% flow limit essentially makes you do as a lender, does not feel like the right position to be in if you're looking as a society and as a government to improve access to home finance.” Dockar added: “Lenders go out of their way to ensure they do not miss these targets and will typically set risk limits of 10-12% to make sure this is the case - the flow limits are not being fully used.”
Gen H recently unveiled New Build Boost – a partnership with housebuilder Persimmon and described as a private sector alternative to the former Help to Buy scheme. Purchasers put down a 5% deposit, alongside an 80% LTV mortgage with the lender, and Gen H closes the gap with a 15% interest-free ‘boost’, supported by the building company.
Dockar praises the way Labour has approached the UK’s housing issues since it came to power last summer. “They're looking into some quite ingrained challenges that have been the case for decades on the supply side,” he said. “So unpicking the planning system and reducing the cost of acquiring and developing on land are important considerations. They seem to be taking that quite seriously.”
The BoE Financial Policy Committee this week discussed how its LTI flow limit policy was working and noted that most large lenders were currently materially below the 15% threshold, but their high LTI shares could increase if they changed their approach to testing individual borrower affordability. It reported afterwards: “The FPC was supportive of lenders making use of their individual LTI flow limits consistent with their own risk limits and business models. In support of this, the FPC would consider whether there were any impediments to using those limits for those lenders that wished to.”
