June marks the end of the Financial Conduct Authority’s (FCA) initial response period on simplifying mortgage rules. This was launched with the aim of making it “easier, faster and cheaper” for borrowers to get a mortgage. In addition, the FCA has been reminding lenders of the “flexibility” in the rules when it comes to accessing a mortgage in the first place. For example, the industry also expects any further loosening of regulations to include a lowering of the Loan-to-Income (LTI) limit, which currently restricts most mortgages to no more than 4.5 times a borrower’s income.
With homeownership out of reach for many, a key goal behind the relaxing of mortgage rules is to make it easier for first time buyers to get on the housing ladder and open the possibility to those currently locked out of the market. Research published in June from property services company Savills suggests an easing of stress tests for first-time buyers could see the number purchasing a home rise by as much as 24 per cent, which equates to more than 80,000 new mortgage holders in the UK over the next five years.
Alongside lower requirements for securing a mortgage, rule changes could see applicants being able to borrow more than previously, allowing them to purchase larger properties in more desirable locations. According to the Government’s latest findings, 164,000 owner-occupied households are considered overcrowded. While still notably lower than those renting, the larger loans on offer may go some way to alleviating this pressure on households currently unable to afford suitable accommodation.
From an industry perspective, in the simplest terms, more borrowers mean more business. The easing of mortgage rules could see the size of lenders’ portfolios increase significantly, along with revenue, as more loans are approved. Both the Government and FCA have placed an emphasis on fostering growth, and the resulting knock-on effect of the rule changes could drive economic activity in a sector seen as crucial to the UK economy. Meanwhile, this would likely foster greater competition as new lenders could appear, attracted to a market by an easier lending environment. This in turn could lead to applicants being offered even more favourable terms.
While lenders are still required to assess a borrower’s ability to repay the loan, loosening the Loan-to-Income limit could see some borrowers stretching further to take on debt at a time when household budgets are already strained from increased living costs and higher interest rates. As we have seen, rates can change significantly in a short space of time.
From 2021 to 2023, the Bank of England raised rates from historic lows of 0.1% to 5.25%, causing difficulties for many mortgage holders, although the market stayed remarkably resilient – in part due to the rigorous stress tests put in place following the financial crisis. The macroeconomic environment remains unpredictable, with inflation creeping up once again and global disputes threatening economic growth. Lowering barriers to mortgages could see a higher number of borrowers left vulnerable to economic shocks or a sudden change in personal circumstances, with knock-on effects for the market as a whole.
The lessons of the financial crisis continue to weigh on lenders’ minds, as a major contributing factor was mortgages being sold to borrowers who ultimately could not afford to repay them. Balancing growth without creating systematic risk is a goal that lenders and policy makers likely share.
The elephant in the room when it comes to weighing up the opportunities and risks of loosening mortgage rules is the number of affordable homes available. Even if risks are appropriately managed and demand grows safely, increasing the number of borrowers with access to a mortgage could result in more buyers competing for the same number of homes. Increased competition could drive up already-high house prices and make home ownership even more expensive, particularly for first time buyers. Without more supply to balance more demand, loosening mortgage affordability rules will only go so far.
While easing regulations could boost economic growth by increasing the number of mortgage holders as well as promoting competition among lenders, any changes to the current stress-testing rules and the loosening of the Loan-to-Income limits could expose borrowers to higher levels of debt, making them vulnerable to future economic shocks. The question is: how do we balance the potential reward of growth with the risk?
The entire industry, including policymakers, lenders, and servicers, must work together to develop frameworks that ensure new loans that are originated under a looser framework are still safe. Enhanced risk management is therefore essential, and lenders will need to implement strong risk frameworks to ensure borrowers can still afford their mortgages, even in the event of a financial shock. New technology and risk management platforms that flag early risk indicators in a portfolio will also be crucial and could ensure potential risks are handled before things start to cascade. Lack of supply notwithstanding (a topic for another day), leveraging state-of the-art risk management systems could help us experience the benefits of relaxed mortgage rules while mitigating against the associated risks.