IMF: ‘LTV cap needed to stave off another crisis’


The International Monetary Fund is calling for a cap on LTVs and tighter restrictions on loan-to-income ratios to offset future risks to the UK housing market.

The IMF said today it is worried about the proportion of mortgages lent at high LTIs and house price growth rising to more than three times income growth.

In a statement on the health of the UK economy, the IMF said that macroprudential action will be needed later this year to keep housing and mortgage markets “buoyant”.

It says: “The recent increased activity may partly reflect a temporary rush to buy houses before higher transaction taxes on some home purchases took effect in April.

“However, if current housing and mortgage market trends persist, further macroprudential tightening (e.g., tighter LTI or loan-to-value limits) will be needed later this year to avoid financial stability risks that may arise from excessive household indebtedness.”

The IMF added the buy-to-let market should also be subject to macroprudential measures similar to the owner-occupied market.

The proposals are laid out in a report by IMF staff and will be presented to the IMF board for consideration.

The fund also suggested that the commercial real estate market should be closely monitored due to rapid growth in 2014 and 2015 that has now tailed off.

In June 2014 the FPC announced lenders had to make sure no more than 15 per cent of new lending was at income multiples of 4.5 or more.

The knee-jerk reaction from lenders was to restrict this type of lending. In mid-2014 around 10 per cent of new loans were at high income multiples, but this fell to below 7 per cent the following year.

But the cap has been questioned by bodies like the CML, which says these loans help tackle the problem of average household incomes falling behind average house prices.

CML figures released in late February showing lender appetite for high income multiple loans is bouncing back rapidly, showing strong underlying demand.

In April the Prudential Regulation Authority published a consultation paper proposing to strengthen buy-to-let underwriting standards by insisting on a minimum level of stress testing to ensure loans remain affordable when rates rise.

However, the PRA was clear it was not suggesting supervisory guidance for LTV standards, though it says it expects firms to have “appropriate controls in place to monitor, manage and mitigate the risks of higher LTV lending”.

The Bank of England’s Financial Policy Committee is also expected to bring in new rules for buy-to-let underwriting soon.