The chancellor’s plans to relax mortgage lending rules as part of the government’s drive for growth has set the cat among the pigeons for regulators, brokers and lenders.
The move was welcomed by brokers and lenders, but met with a fixed grin by watchdogs.
Appearing before the Treasury select committee last month, Bank of England governor Andrew Bailey argued that current home loan rules had prevented the rise in repossessions that the UK saw in the aftermath of the 2008 financial crisis. The figure currently runs at around 1,000 a quarter.
Relaxing this restriction would unlock mortgage borrowing
Bailey said this was the case despite the “major economic shocks over the last five years” that the country had come through, such as the pandemic and the war in Ukraine, which spiked energy prices.
But the governor added he would “welcome a public debate” over the danger of higher repossessions weighed against lower mortgage stress tests that would open up the home loan market.
These comments were foreshadowed by Financial Conduct Authority chief executive Nikhil Rathi, who a few days previously had told the House of Lords financial services regulation committee that he thought parliament should lead the debate.
If quarterly repossessions were to double, Rathi asked the committee, “would that be acceptable to parliament?”.
This appearance by Rathi followed an exchange of letters last month between himself, prime minister Keir Starmer and chancellor Rachel Reeves, in which the regulator promised to “simplify” home loan rules.
Regulators could endorse a rent-to-own model where a portion of a borrower’s rental payments over a set period is converted into deposit equity
This will include consulting on scrapping “maturing interest-only mortgage and other outdated guidance”, and tearing up “overlapping standards” such as the Mortgage Charter, established to support borrowers struggling to keep up monthly payments following the September 2022 mini-Budget of then prime minister Liz Truss.
But for many in the industry the key restriction is 2014 guidance set by the Financial Policy Committee (FPC), which says that no more than 15% of a major lender’s loan book should be lent above 4.5 times a borrower’s income.
This powerful 13-strong committee is chaired by Bank governor Bailey and includes the FCA’s Rathi and Prudential Regulation Authority chief executive Sam Woods.
Perenna chief executive Arjan Verbeek says: “The guidance is over 10 years old and was set in the aftermath of the financial crisis — but the world has changed dramatically since then. Relaxing this restriction would unlock mortgage borrowing.”
There is a case for reviewing the LTI cap — to assess whether there is an opportunity to increase it, either in general or for FTBs
UK Finance director of communications Andy Donald adds that the loan-to-income (LTI) cap hinders lending to young professionals, such as doctors and accountants, “where there is a clear future salary progression”.
Donald says: “There is a case for reviewing this cap to assess whether there is an opportunity to increase it either in general or for first-time buyers [FTBs].”
John Charcol senior mortgage technical manager Ray Boulger puts it simply: “This restriction forces lenders to choose which credit-worthy applicants to reject.”
Boulger also highlights Nationwide, which last month lifted the minimum income threshold for sole applicants on its popular Helping Hand mortgage, at up to 95% loan-to-value (LTV), from £35,000 to £40,000. Nationwide said this income level had been raised to ensure it stayed within regulatory LTI lending limits.
However, Bank of England executive director Nathanaël Benjamin told MPs last month that easing stress tests without a rise in housebuilding would only see “house prices go up”.
The FPC also points to its November Financial Stability Report, which puts the aggregate share of mortgage lending at high LTI ratios at 7% in the third quarter of last year, well below its 15% limit.
It adds that the share of FTB mortgages hit 52% during this period, up from 44% in 2013 and near its highest point since 2005.
The [LTI] guidance is over 10 years old and was set in the aftermath of the financial crisis — but the world has changed dramatically since then
Despite this, Connect Mortgages chief executive Liz Syms points out that she is looking for reforms that “go beyond just tweaking stress-testing rules”.
Syms adds: “Regulators could endorse a rent-to-own model where a portion of a borrower’s rental payments over a set period is converted into deposit equity, easing the challenge of saving while paying rent.
“Another move could be the creation of government-backed mortgage guarantee schemes, not just for 95% mortgages but for mid-tier LTV lending, where affordability is a challenge despite a reasonable deposit.”
Private Finance technical director Chris Sykes also thinks rental payments may be a key to unlocking mortgage affordability.
Sykes says: “Many argue that payment history is a better indicator, and things such as rent could be brought into calculations to help achieve higher borrowing power.
“But if rent is taken into account lenders will need to be careful how this is applied. It might well be that the expertise to analyse rental histories lies with lenders that are not on the high street.
Rental payments may be a key to unlocking mortgage affordability
“To do this will require good technology and credit-referencing agencies, as well as plugging into the data of letting agents.”
However, Syms fears that, after six months of industry consultations, regulators will propose “a small relaxation of stress-testing rules, or minor tweaks to affordability calculations”.
She is not the only one in the industry who worries whether the drive for growth will bypass the mortgage market.
