IMLA has long argued that the limit is arbitrary, and that increasing or scrapping it would boost lending to first-time buyers, single purchasers and those on moderate incomes. Given that the average house price to income ratio in the UK is 8:1, many homebuyers, particularly those in London and the south-east, need to borrow more than 4.5 times their income. The mortgage industry has coalesced around the arguments for reviewing the LTI, but the FPC has not yet shifted its position. Instead, it has concentrated on raising the £100m lending threshold at which the rule kicks in to £150m. But this will have little or no bearing on the market given that it will affect only a small number of lenders which currently fall outside scope. So what was the rationale behind the introduction of the LTI limit? The Financial Stability Report of December 2021 claimed that, when the economy experiences declines, highly indebted households are more likely to cut spending sharply, “amplifying downturns, increasing the risk of losses to lenders on all forms of lending and reducing incomes throughout the economy.” The LTI policy was intended to guard against the risk of such a build-up of excessive household indebtedness. However, recent academic research suggests there is no robust correlation between levels of debt and household spending patterns. One particularly influential paper* found strong evidence that homeowners who had previously lived beyond their means, those who were more optimistic about future income prospects and those who made a large ticket purchase (such as a car) shortly before a downturn, subsequently cut back their expenditure. It concluded: “It follows that high household debt-to-income ratios in themselves contain little or no information about risks of a spending fall associated with household indebtedness”. This undermines the very premise on which the LTI limit was introduced. It is difficult to measure the precise impact the LTI limit has had on the landscape, but it may well have contributed to the 3.1m shortfall in first-time buyer numbers since the 2008 financial crisis, revealed in IMLA’s Mortgage Affordability Paradox report of 2024. Our research revealed that, despite strong affordability during the ultra-low interest rate years from 2013 to 2022, firsttime buyer numbers failed to pick up to anything like the level previous trends would have suggested. Homeownership is fundamental to national economic growth – and the long-term cost to individual consumers of not purchasing a home is extraordinary. As IMLA’s report on The Intergenerational Divide in the Housing and Mortgage Markets (2019) explained, even assuming no house price growth for the next 30 years, someone buying an average home, initially with a 25 year 95% LTV repayment mortgage, could be £352,000 better off than someone who continues to rent privately. At current rates, we are storing up problems for the future. If households are still renting into retirement, increasing numbers are likely to be unable to pay private sector rents without significant financial support from the government. At IMLA, we believe that much more attention needs to be paid to the financial implications for households that are unable to become homeowners. During these economically constrained times, the government may be loath to consider spending money on support schemes such as Help to Buy, Stamp Duty discounts or boosting shared ownership. But revising or removing the LTI limits is a simple – and cost-free – option which could open the door to homeownership, security of tenure and improved financial stability for a significant number. *Household Debt Overhang Did Hardly Cause a Larger Spending Fall during the Financial Crisis in the UK by Lars E.O. Svensson. 09 MORTGAGE NEWSLETTER
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