The FPC’s mortgage market recommendations

Read more about the Financial Policy Committee's recommendations to the PRA and FCA.

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. These limit the proportion of new mortgages with high loan to income (LTI) ratios and specify a stress interest rate for lenders when assessing a prospective borrower’s ability to repay a mortgage. These Recommendations apply to all lenders who extend residential mortgage lending of more than £100 million per year.

Interest rate stress test

The FPC’s ‘interest rate stress test’ Recommendation builds on our rules and specifies 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 is intended to be read together with the FCA requirements around considering the effect of likely future interest rate rises as set out in MCOB 11.6.18(2). In December 2021, the FPC announced that they intend to consult, in 2022, on withdrawing this recommendation. 

If, following their consultation, the FPC do withdraw this recommendation, our MCOB rules on responsible lending would 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. 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 of the MCOB rules in our Handbook.

The Bank of England website sets out records of the FPC policy meetings.

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) 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.

The Bank of England website sets out records of the FPC policy meetings.

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).

Page updates

14/12/2021: Information changed Page updated with new information