The mortgage industry expects regulators to loosen several key restrictions this spring, in line with the government’s drive for growth — but, by the end of the year, lenders may find the biggest prizes still out of reach.
Financial Conduct Authority chief executive Nikhil Rathi wrote in his December letter to prime minister Keir Starmer that the watchdog would “reduce burdens further and faster” to cut red tape.
Many in the home-loan industry expect to see the results of this over the next few weeks, with some, perhaps, announced by chancellor Rachel Reeves in her Spring Statement alongside the latest Office for Budget Responsibility forecast on 26 March.
Regulators argue that… what lenders actually want is regulatory cover to do what they are already allowed to do
The first of the quick wins the property market hopes for is the scrapping of the Mortgage Charter. The charter was introduced in the summer of 2023 to help homeowners worried about meeting monthly mortgage payments as rates spiked in the aftermath of the September 2022 Liz Truss Budget.
Intermediary Mortgage Lenders Association (Imla) executive director Kate Davies says: “Existing Mortgage Conduct of Business rules on treating customers fairly, the Consumer Duty and forbearance already enable lenders to do much more to help borrowers without unhelpful prescriptive limitations.”
The market also expects interest-only mortgage guidance to fall by the wayside following a review by the FCA among 12 lenders last year, which is yet to be published.
Concern over these home loans hit a peak in 2012 when the regulator labelled them “a ticking timebomb” after it estimated that around 1.3 million of the three million households who held these loans at the time were not on track to have enough savings to pay off the principal debt when it fell due.
A 15% limit surely makes a mockery of the value placed on diligent underwriting
Davies adds: “The number of interest-only borrowers has fallen far more quickly than anticipated, from two million in 2015 to less than one million last year, which indicates that lenders’ current approach to interest-only — and borrower behaviour — is working.”
Regulators may also move to make the small number of regulated buy-to-let (BTL) loans unregulated, matching the rest of this sector. Watchdogs may look to cut red tape by shifting the relatively few consumer BTL sales — such as ‘accidental’ landlords who inherit a property, or those who rent to family members — into unregulated territory, classing them as essentially business deals.
But the biggest gains for lenders lie at the end of this year and may, perhaps, run into 2026.
Institutions have been pushing to relax 2014 Financial Policy Committee restrictions limiting large firms to issuing no more than 15% of new loans to customers at, or above, 4.5 times their income. The industry hopes to change this figure to between 18% and 22% of new loans.
Lenders can already exceed the ‘standard variable rate plus 1%’ ruling if they can justify their thinking to the regulator
Last month Nationwide called on the government to review the existing limit, citing its Helping Hand mortgage, launched in April 2021, which accounted for 23% of Nationwide’s first-time buyer (FTB) mortgages last year.
The lender was able to boost lending from 5.5 times to six times income in late September through the product, which allows higher loan-to-income (LTI) lending up to 95% loan-to-value.
But, in January, Nationwide lifted the minimum income threshold for sole applicants for the loan to £40,000 from £35,000, citing the need to stay within regulatory LTI lending rules.
Nationwide director of home Henry Jordan says: “We are at the limits of where we can take this product. We have not named a particular threshold but, if the limit was lifted to, say, 20%, we could fund another 10,000 FTBs over the next year.”
Mortgage Finance Brokers business development director Jeni Browne adds: “There are great policies protecting borrowers in terms of underwriting. A 15% limit surely makes a mockery of the value placed on diligent underwriting.”
However, regulators are wariest about relaxing rules on affordability and lending ratios, fearing a spike in house prices and repossession levels, the latter currently running at around 1,000 a quarter.
Bank of England (BoE) governor Andrew Bailey, appearing before the Treasury select committee in January, said “a public debate” was needed over the trade-off between higher repossessions and looser lending.
We are at the limits of where we can take this product. If the limit was lifted to, say, 20%, we could fund another 10,000 FTBs over the next year
At the same meeting, BoE executive director Nathanaël Benjamin added that, if stress tests were lowered without a rise in housebuilding, that would only see “house prices go up”.
Association of Mortgage Intermediaries senior adviser Robert Sinclair says: “Discussion of allowing lenders with a small balance sheet of around £5bn some limited flexibility is the best I have heard on this. That would give some leeway to around 30 smaller building societies and some challenger banks.”
Lenders are also pressing regulators to relax affordability tests — currently stressed by banks at a lender’s standard variable rate plus 1% — to looser standards pegged to the BoE’s two- and five-year rate forecasts.
JLM Mortgage Services group director Sebastian Murphy says: “A relaxed version is clearly necessary — but why would it be based on forecasts, rather than the actual pay rate on the mortgage?
“That seems infinitely better than a stress test based on a forecast. A more appropriate stress test could be 1% to 2% above pay rate.”
Lenders’ current approach to interest-only — and borrower behaviour — is working
But Sinclair points out: “Lenders can already exceed the ‘standard variable rate plus 1%’ ruling if they can justify their thinking to the regulator.
“Regulators argue that this is already in the gift of lenders, and what they actually want is regulatory cover to do what they are already allowed to do.”
Changes are on the cards for the mortgage industry in 2025 — but regulators seem intent on holding onto the aces in the pack.
