BSA warning over permanent LTI cap

The Building Societies Association has urged policymakers not to make the proposed LTI cap permanent and for it to be reviewed after 18 months. 

Responding to a Prudential Regulation Authority consultation, the trade body said making the cap permanent would be a “backward step”. 

The BSA’s response, published last week, adds: “As this measure has been introduced in response to current market conditions we believe that the cap should have a defined end point.

“Aiming to remove the cap after 18 months if market conditions have changed would ensure that it does not become a permanent part of the market. This also gives the FPC the opportunity to weigh up what effect it has had and reintroduce it in the future should market conditions warrant it.”

The Bank of England’s Financial Policy Committee announced in June that lenders must restrict lending at an LTI multiple of 4.5 times income to 15 per cent of new loans from October.

At the same time the FPC recommended lenders stress test borrowers’ affordability as if base rate was at least 3 percentage points higher at any time over the first five years of the loan. The PRA has been consulting on both measures since then and they are due to be introduced on 1 October. 

The cap applies to institutions with mortgage lending of £100m or greater, which the BSA says captures 15 of its 44 members, but adds the cap could capture five additional building societies if current lending targets are met.

The trade body also recommends allowing lenders to “carry over” any unused lending above the 4.5 times income multiple in each quarter.

For example, if a lender only advances 10 per cent of its new loans above the LTI limit in a quarter, the BSA says the remaining 5 per cent should then be allowed to carry into the next quarter. It says: “This would enable lenders to sufficiently adjust to the natural ebb and flow of market fluctuations.”

According to the BSA, the cap on high-LTI lending discriminates against first-time buyers, particularly in London where house prices are higher.

The trade body says: “While the PRA may judge that this less favourable treatment of younger borrowers pursues a legitimate aim, it risks further increasing the average age of first-time buyers and their collective ability to get on the property ladder.”

As a potential solution, the BSA recommends changing the LTI limit for smaller lenders with gross lending between £100m and £500m to ensure first-time buyers are “sufficiently catered for”.