The FCA built a ‘higher wall’ in the mortgage market when it introduced the mortgage cap in 2014, according to Hargreaves Lansdown.

Responding to a new paper published by the FCA about the impact of the cap on high loan to income (LTI) mortgage lending, the financial services expert suggested the cap has made life more difficult for first-time buyers.

From October 2014, the regulatory change covered lenders issuing mortgages worth a total of £100m or more per year and meant that no more than 15% of a lender’s mortgages could be 4.5 times an income or higher.

The research paper revealed that although the overall proportion of high LTI mortgages to the total number of sales in the market had remained at around 10% since the policy, the measure had shifted the dynamics of the market.

Hargreaves Lansdown personal finance analyst, Sarah Coles, commented: “In 2014, the FCA effectively built a higher wall in the mortgage market. It offered more protection to those safely tucked inside, but made it much harder for anyone else to get in.

“Since the introduction of the cap, lenders can’t offer loans of more than 4.5 times salary to more than 15% of their customers. This helped bring much-needed security to the industry, which is now far less exposed to large numbers of customers borrowing many multiples of their earnings.

“But it also encouraged lenders to cherry pick their 15% – offering higher loan-to-income ratios to people who already own a home, who have large incomes and are buying expensive houses with large deposits. This has made life more difficult for first-time buyers.”

The FCA paper revealed the allocation of credit across LTI ratios has changed since the cap was introduced – with lenders having increased new mortgages at LTI ratios just below 4.5, and restricted lending at LTI ratios above 4.5.

The research paper confirmed that some lenders, whose share of high LTI mortgages had been closer to the 15% limit, reduced their proportion of high LTI, while others that previously had a low share of high LTI mortgages increased their proportion of them.

Hargreaves Lansdown suggested it has become much harder for first-time buyers to borrow larger multiples of their income.

“They’re now more protected from the risk of overstretching themselves, but may have to save a much bigger property deposit to get onto the property ladder,” Coles added.

“It’s one reason why we need all the help we can get when putting a deposit together. If you’re aged between 18 and 39 and have at least a year before you plan to buy, it’s well worth considering a Lifetime ISA, because the government will top up everything you pay in by 25%. So, if you put aside the maximum of £4,000 a year, they’ll add another £1,000.

“It still doesn’t make it easy to get onto the property ladder, but a wedge of free money from the government is always going to help a bit.”

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