Written by:
James Tatch, Principal, Analytics, UK Finance

In the minutes of the FPC’s March meeting released last week, the Committee observed that, although its macroprudential measure limiting lenders’ exposure to new lending at over 4.5 times income to no more than 15 per cent of new residential loans was in force, there has been an increase in the proportion of lending at just below that 4.5 times income “soft cap”.

When considering this, it’s useful therefore to understand the differences between conduct and prudential risk and its potential impact for customers. Conduct risk being the risk of customer detriment by the actions of lenders and prudential risk being the systemic risk to the firm of not holding sufficient capital or having inadequate risk controls in place.

Responsible lending is an industry requirement, regardless of LTI

From a conduct perspective, regardless of the LTI (Loan to income), every new residential mortgage is underpinned by responsible lending requirements. When consulting on its MMR (Mortgage Market Review) proposals for responsible lending, the FSA (now FCA) ruled out the use of LTIs as the sole method of assessing affordability, as this was seen as a blunt instrument in assessing ability to pay. Essentially, this is because LTI takes no account of absolute levels of income and how that translates into a household balance sheet.

Instead the MMR rules require lenders to assess affordability by establishing whether the borrower can afford mortgage payments over the life of the mortgage, after subtracting other regular household expenditure from their income, and building in a buffer for higher interest rates in future. This ensures that all regulated (homeowner) lending is affordable, from the lowest to the highest LTIs.

Higher LTI does not equate to higher defaults

In January we released new regional analysis of our loan-level data showing that, where high LTI lending is most prevalent (most notably London and the South East), these localities actually have the lowest incidence of mortgage arrears:

Residential mortgages outstanding, December 2017:

% of mortgages that are in arrears

% of mortgages at over 4 times income

Source: UK Finance Regulated Mortgage Survey


  1. Arrears measured as those in arrears representing 2.5% or more of balance outstanding

Although a striking pair of maps, this could theoretically be a spurious negative relationship, perhaps driven by other regional factors.  As a further piece of visual evidence though, the chart below clearly sets out at the UK level that, as LTI increases, the proportion of mortgages in arrears falls, with those lent at over the PRA’s 4.5 “soft cap” since 2014 showing half the incidence of arrears as those with lent at LTIs under 2 over the same period.

Proportion of mortgages in arrears in December 2017, by LTI

Source: UK Finance Regulated Mortgage Survey


  1. Arrears measured as those in arrears representing 2.5% or more of balance outstanding
  2. Loans in sample include those originated between 2014 and 2016.

This is not to say that arrears do not exist at high LTIs. We do need to also consider that we are in an exceptionally low arrears environment now, helped by benign interest rates and employment, and so all comparisons are from a very low base. But from a conduct perspective, higher LTI does not necessarily equate to riskier lending and lenders will continue to operate within the same responsible lending framework.

Risky Lending?