Read more about the Financial Policy Committee's recommendations to insure against the risk of a rapid build-up of mortgage debt.
FPC recommendations
A rapid build-up of mortgage debt has historically been an important source of risk to financial and economic stability. To insure against such risks, the FPC introduced two Recommendations in 2014. The first of these limits the proportion of new mortgages with high loan to income (LTI) ratios. This Recommendation applies to all lenders who extend residential mortgage lending of more than £100 million per year.
A second Recommendation, withdrawn with effect from 1 August 2022, specified a stress interest rate for lenders when assessing a prospective borrower’s ability to repay a mortgage.
Loan to income flow limit
The FPC’s ‘loan to income flow limit’ Recommendation limits the number of mortgages extended at LTI ratios of 4.5 or higher to 15% of a lender’s new residential mortgage lending.
We have published finalised guidance (FG17/2[1]) setting out how we expect firms to act in light of the FPC’s recommendation.
The PRA takes the lead on this for all lenders that they prudentially regulate.
Read the PRA rules on LTIs[2].
Interest rate stress test
The FPC’s ‘interest rate stress test’ Recommendation (withdrawn with effect from 1 August 2022) built on our rules and specified that lenders should assess whether borrowers could still afford their mortgage if, at any point over the first five years of the loan, mortgage rates were to be 3 percentage points higher than the contractual reversion rate. This recommendation was intended to be read together with the FCA requirements around considering the effect of likely future interest rate rises as set out in MCOB 11.6.18R(2).
While the FPC Recommendation has been withdrawn our MCOB rules on responsible lending[3] continue to apply. These rules specify that, unless a mortgage’s interest rate is fixed for 5 years or more from the expected start of the mortgage term (or for the duration of the contract, if less than 5 years), mortgage lenders must take into account the impact of likely future interest rate increases on affordability as set out in MCOB 11.6[3]. When conducting this assessment, firms should take into account the variable interest rates that would take effect during the first 5 years of the mortgage contract, including reversion rates, if applicable.
The relevant rules are set out in Chapter 11.6[4] of the MCOB rules in our Handbook.
The Bank of England website sets out records of the FPC policy meetings[3].
Taking into account new or revised FPC Recommendations
We will not expect firms to re-assess pipeline cases following a new or revised recommendation if an affordability assessment has already been undertaken. The exception is where there is a change to the pipeline case that materially affects affordability (such as an increase in borrowing).