The Bank of England Following its June meeting the FPC has recommended loans worth more than 4.5 times income should occupy less than 15% of a firm’s new mortgage lending.

Mortgage lenders should also apply an interest rate stress test to assess whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Base Rate were to be 3% higher than the rate at origination.

This has been recommended to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and a consultation period will take place between now and August 31.

New rules will formally come into effect on October 1 and in the interim the PRA will expect firms not to act in a way that might undermine the recommendations.

The FPC said the new rules would prevent ‘excessive household indebtedness’ and lenders should continue to apply whatever criteria they feel are appropriate to their risk appetite when taking individual lending decisions.

The PRA said it would not expect firms to vary their lending practices as a result of this policy unless they find that they would otherwise be in breach of the limit. The rules will apply to all firms lending more than £100m each year.

“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5,” a statement from the FPC said.

“This recommendation applies to all lenders which extend residential mortgage lending in excess of £100m per annum. The recommendation should be implemented as soon as is practicable.”

While rules will not come into force until 1 October 2014, mortgage offers made or decisions in principle taken before the proposed rule comes into effect but which complete after 1 October 2014 will count towards the limit.

A statement from the Financial Conduct Authority said: “Following the FPC’s recommendations today, the FCA will consult on general guidance which will provide details on how we propose to follow the recommendation on loan to income ratios. This will include how we will calculate and apply the de minimis £100m threshold and the ratios.

“This will only affect a small number of FCA regulated firms so general guidance is considered a proportionate and appropriate approach to implementing the loan to income ratio, especially whilst the industry continues to adjust to the Mortgage Market Review.

“With respect to the FPC’s recommendation on interest rate stress testing, our mortgage rules require firms to have regard to FPC recommendations on stress test levels. We expect lenders to have regard to what the FPC has said today.

“The FPC’s recommendations come after the introduction of the MMR in April and are consistent with our aim to hard-wire common sense into mortgage lending and ensure that mortgages remain affordable for consumers if interest rates rise in line with market expectations.”

Paul Smee, director general of the Council of Mortgage Lender said:

“The new affordability stress test that requires lenders to check their borrowers’ affordability against an assumed Bank rate 3% higher than at origination will clearly ensure resilience to shocks.

“Limiting the level of a lender’s lending to no more than 15% of new mortgages at 4.5 times income or above (and none at all for Help to Buy guaranteed loans) is likely to impact the London market more than elsewhere. Nationally, 9% of new loans are at 4.5 times income or more, but the figure is 19% in London.

“It’s important not to confuse these measures, which are designed to ensure financial and economic stability, with wider housing policy, for which the Bank is not responsible. Additional housing supply to help correct the imbalance between supply and demand is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term.”