Amendments to Rules on Loan to Income Ratios in Mortgage Lending

The Prudential Regulation Authority (PRA) have published a policy statement in March 2016 (PS11/16) which sets out final rules to keep second and subsequent charge mortgage contracts excluded from the loan to income (LTI) flow limit, following the implementation of the Mortgage Credit Directive (MCD). It also provides feedback to responses to the PRA’s February 2016 consultation paper (CP6/16) on amendments to the PRA’s rules on loan to income ratios in mortgage lending. The rules came into force on 26 March 2016.

From 21 March 2016, second and subsequent charge mortgage contracts fell under the definition of a regulated mortgage contract. This change is part of the UK’s implementation of the MCD, which applies equally to first and subsequent charge mortgages. The PRA’s rules, which implement a Financial Policy Committee (FPC) recommendation, place a LTI flow limit on regulated mortgage contracts. Hence, the implementation of the MCD means that the LTI flow limit would have automatically applied to second and subsequent charge mortgage contracts, which are currently exempted from the LTI flow limit.