FCA and PRA finalise new high loan-to-income mortgage framework – what lenders need to do now

The PRA policy applies to all PRA-authorised mortgage lenders and any subsidiary of a PRA-authorised firm that is a mortgage lender; the FCA's general guidance applies to all FCA-authorised mortgage lenders that are not a subsidiary of PRA-authorised firms.  The regulators' expectations regarding general governance and risk management standards around high LTI lending are set out in the new PRA supervisory statement and the new FCA replacement general guidance, sitting alongside existing requirements in the Risk Control Part of the PRA Rulebook and the FCA's SYSC rules.

While the aggregate high LTI flow is within a level consistent with the FPC's recommended 15% limit, lenders are able to lend above that level.

If the aggregate becomes inconsistent with the FPC's limit, the regulators may expect firms to gradually reduce their share of high LTI lending back towards 15% in a smooth and predictable way.  The PRA expects firms to monitor the aggregate high LTI flow level, as published by the PRA, against the FPC's 15% aggregate limit and consider how this may impact the firm's future flow of lending.

The PRA will calculate and publish the aggregate high LTI flow figure on its High loan to income (LTI) lending webpage each quarter, and will also calculate and publish the total volume of completed mortgages in scope of the policy and how this compares to the volume of all completed mortgages in the quarter.  The PRA will publish the aggregate flow of high LTI on its website alongside supporting information for 2026 Q3 in 2026 Q4.  Firms should track this quarterly publication as part of their ongoing compliance monitoring, it is the primary trigger for the adjustment mechanism.

The PRA supervisory statement is relevant to all firms in scope of the Housing Part of the PRA Rulebook, with PRA rules also requiring relevant firms to apply the rules at UK subsidiary level; the statement sets out expectations for firms entering into high LTI mortgages and defines the firm's 'high LTI flow' as the percentage of all regulated mortgage contracts entered into in a set of four calendar quarters that are high LTI mortgage contracts.  The FCA's policy is relevant to FCA-authorised mortgage lenders that are not a subsidiary of PRA-authorised firms.

The enhanced obligations apply to firms above the de minimis threshold, defined as firms that, during both of two consecutive sets of four quarters, have entered into regulated mortgage contracts under which the total credit provided is less than £150 million, or have entered into fewer than 300 regulated mortgage contracts in each of those sets of four quarters.  For a firm that has previously been below the de minimis threshold but is now above it, the enhanced provisions apply from the start of the second quarter following the end of the final quarter relevant to the determination that the firm is above the threshold, and will cease to apply if the firm's regulated mortgage lending falls back below the threshold.

A firm engaging in high LTI lending should have in place a framework of risk management and compensating lending controls to ensure such activity is delivered in a prudent manner, in line with the requirements set out in the Risk Control Part of the PRA Rulebook; where a firm is a member of a group, the risk management framework may be implemented for each relevant firm or at a wider group level as appropriate.  The regulators hold the view that firms currently extending any high LTI mortgages should already have appropriate measures in place to manage such lending and the risks associated with it – however, there may be firms who wish to increase their high LTI flow beyond 15% that may consider it necessary to enhance their existing controls in order to assure themselves of their ability to make future reductions.

Where a firm makes risk management changes in order to increase its high LTI flow to a level above 15%, the PRA expects it to discuss these changes as part of regular engagement with supervisors, and will expect to see evidence of mechanisms in place to exercise effective oversight of the corresponding risk management and controls, supported with meaningful and well-targeted management information used to inform board discussions.  Effective oversight should include: risk appetite limits on high LTI lending; and, where absent, monitoring against relevant risk limits covering the current flow of high LTI lending, the expected future flow, related credit concentrations and high-risk segments, and the performance of these mortgages.

In addition to the core governance requirements, a firm above the de minimis threshold must also monitor the aggregate flow of high LTI lending as published by the PRA, and have assurance of its ability to make adjustments to reduce its future flow of high LTI lending if necessary.

In response to consultation responses, the regulators have amended the final policy such that both a firm's high LTI flow and expectations for any adjustment in lenders' high LTI flows are measured on a rolling four-quarter basis; the regulators will, however, use a single-calendar-quarter measure to monitor the aggregate high LTI flow and to inform judgements on consistency with the FPC aggregate limit.

If at any point the PRA and FCA judge that the aggregate high LTI flow is at a level not consistent with the FPC's 15% limit, they may set expectations for any firm with an individual high LTI flow greater than 15% on a four-quarter basis to take steps to reduce its future flow, and the PRA expects that a firm's board should be responsible for overseeing these actions.  The rate at which firms are expected to reduce their flow will be expressed as a fraction, to be applied to the amount their individual high LTI flow, measured on a four-quarter basis, exceeded 15% in the data available prior to announcement; the PRA will state this fraction on its website as part of its publication of the aggregate measure, and the fractional reduction will apply, calculated at the point of announcement for each successive future quarter, until such time as the PRA considers no further adjustment is necessary.

Firms should take necessary action to ensure that their individual future flow of high LTI mortgages is consistent with published PRA expectations; this adjustment should apply only to future lending decisions, and firms are not expected to withdraw existing approved mortgage offers.  Firms below 15% are expected to remain below this level while adjustment expectations are in force, and firms are expected to make any necessary adjustments in line with the timelines published by the PRA, though expected reductions in individual flow measures are not expected to be accurately reflected in data until six subsequent quarters have passed following the announcement.

Higher LTV lending can carry higher RWA costs with the reduction in credit risk mitigation because of the loan splitting approach and other requirements to have higher RWA requirements where the LTV is higher as will be required under the new rules implementing adoption of the Basel 3.1 standards by the PRA.

The regulators have considered the views expressed by respondents and decided not to introduce additional differentiation into their proposed approach, considering the proposed design to be a balanced approach with respect to the concerns raised, such changes would make the process unduly complex and operationally challenging.  

The definition of 'regulated mortgage contract' for the purposes of this framework excludes buy-to-let mortgages, second charge mortgages, further advances, lifetime mortgages, retirement interest only mortgages, and re-mortgages with no change to the principal sum outstanding.

Where more than one firm within a group is above the de minimis threshold, references to 'firms' should be interpreted as applying to the group.  Where a group chooses to apply risk management expectations at group level, the references to 'firms' in that chapter should be read as applying to the group.  Groups with multiple lending entities, whether PRA-regulated, FCA-only, or a mix – must assess their exposure on a consolidated basis and ensure governance, monitoring and reporting frameworks reflect that view.

For firms using the interim measures made available by the regulators, either having consented to the PRA's modification by consent or applied for FCA individual guidance, no actions will be needed because the relevant directions will automatically fall away on 28 October 2026.  Firms that have been operating under interim arrangements should confirm their position and ensure their governance and monitoring frameworks are updated to comply with the permanent regime from that date.