Brokers have argued that the current levels of high loan-to-income borrowing are not a sign that borrowers are taking a risk in order to get onto, or move up, the housing ladder.
Figures from the Bank of England and Financial Conduct Authority this week revealed that the proportion of lending at more than four times an individual borrower’s annual income stood at 46.9 per cent in the last quarter of 2018, its highest value since the two bodies began publishing quarterly residential mortgage lending figures back in 2007.
In addition, 4.4 per cent of mortgages advanced in the quarter had LTVs of at least 90 per cent, up from 3.8 per cent 12 months earlier.
Rise in high LTV lending doesn’t mean stretched affordability
Sebastian Riemann, financial consultant at Libra Financial Planning, said that over the last six to twelve months there had been a “notable increase” in lending at higher LTVs, as well as larger loan amounts in general, but he suggested this did not necessarily mean borrowers were overstretching themselves.
He continued: “The changes implemented from the Mortgage Market Review have been in effect for some time and while the interpretation amongst lenders does vary, in reality these are simply income multiples broken down into more measurable units.
“The loan to income restrictions were a consequence of ever-increasing exposure by lenders and work well when combined with the current affordability framework in my opinion.”
All about affordability
David Hollingworth, director at L&C, emphasised that while high loan-to-income lending is something that needs to be monitored – particularly by the regulator – in truth affordability is the key consideration.
He said: “Looking at whether it’s an affordable and sustainable borrowing amount is the primary test, though this backstop of loan to income (LTI) on lender books acts as a belt and braces, and stems back to concerns post-crunch around the loosening of underwriting standards.”
He added that while some lenders will lend up to five or even 5.5 times income, this is only ever going to be possible if certain affordability requirements are met.
LTI is ‘barbaric’
Last month Charles McDowell, director of specialist mortgages at HTB, slammed LTI as an “appalling” and “completely out of date” metric.
He continued: “I think it’s a barbaric way of looking at lending, particularly when we’re moving in to a data rich environment around banking and really being able to understand how people manage their finances. Why are we using such a blunt instrument?”