“Every regulator… has a part to play by tearing down the regulatory barriers that hold back growth.”
Thus spoke embattled chancellor Rachel Reeves during a recent meeting with UK regulatory chiefs.
A week later, addressing the House of Lords financial regulation committee, FCA chief Nikhil Rathi hit back, outlining the potential pitfalls of tearing up the regulatory rulebook on mortgages.
“Not everybody is going to play completely by the rule book…. If the numbers [of repossessions] went up from 1,000 to 2,000, if we relax lending standards, would that be an acceptable outcome in parliament?”
The FPC must remove its restrictive handbrake
These two quotes encapsulate the Faustian bargain at the heart of the debate. For the FCA, any relaxation of affordability rules appears to conflict with the ethos of the Consumer Duty. For Labour, however, housing policy is not only about fulfilling ambitious manifesto promises; it’s also an attempt to smash the housing political football into the top corner. It aims to kickstart a sluggish economy and restore faith in a new(ish) government.
So far, the FCA has committed to “simplify responsible lending and advice rules for mortgages”, including tidying up overlaps between the Mortgage Conduct of Business Sourcebook and the newer Mortgage Charter.
In his comments to the House of Lords, Rathi went further, calling for an open “discussion on the balance between access to lending and levels of defaults”. This framing, however, seems overly simplistic.
This does not mean sacrificing stability or embracing risk recklessly — it means leveraging data, technology and innovation to create a fairer, more dynamic system
Suggesting the government, the industry and society at large must accept a higher level of mortgage defaults to enjoy broader access to lending is a black-and-white fallacy. It ignores a range of reasonable alternatives.
Blunt instrument
Ironically, the most significant change the market needs sits outside the FCA’s direct purview. The loan-to-income (LTI) cap, introduced in June 2014 by the Financial Policy Committee (FPC), restricts lenders from issuing more than 15% of their new residential mortgages to borrowers with LTI ratios above 4.5 times their income.
The cap aimed to curb rapidly rising house prices and growing household debt. However, its effect has been to stifle lender innovation, blunt the FCA’s responsible lending rules and restrict access to finance.
Suggesting the government, the industry and society at large must accept a higher level of mortgage defaults to enjoy broader access to lending is a black-and-white fallacy
Unlike FCA rules, which encourage nuanced assessments of individual borrower circumstances, the LTI cap is a blunt macro-level instrument. It applies equally to all lenders, regardless of their customer risk profiles, capital adequacy or credit risk policies.
One unintended consequence has been the worrying growth in longer-term mortgages. Terms of 30, 35 or even 40 years are becoming the norm, significantly increasing the cost of borrowing and leaving first-time buyers in their 30s carrying mortgage debt into their 70s.
Meanwhile, many lender affordability models would allow certain borrowers with a clean credit history to borrow six to seven times their income without materially increasing the risk of default. Yet these models are routinely capped at 4.75 times income to avoid breaching the LTI flow limit.
For the FCA, any relaxation of affordability rules appears to conflict with the ethos of the Consumer Duty
This is not a call to abandon regulation altogether. Replacing the LTI cap with borrower-specific, dynamic limits could reflect individual circumstances, economic conditions and lender practices, while remaining aligned with the FCA’s commitment to the Consumer Duty.
More tailored LTI rules could include provisions such as profession-based flexibility, offering higher LTIs to borrowers with predictable income growth. Regional adjustments could be introduced. And rental affordability evidence could play a role, enabling higher LTIs for borrowers with a history of paying rent that exceeds their projected monthly mortgage repayments. None of these ideas are new, but their prevalence is highly restricted as lenders balance innovation with the LTI flow limit.
With the handbrake removed, further innovation would follow. Lenders could explore higher LTIs for borrowers with excellent credit scores, or adjust LTIs based on loan-to-value ratios or mortgage terms.
Ironically, the most significant change the market needs sits outside the FCA’s direct purview.
To unlock mortgage accessibility, the FPC must remove its restrictive handbrake, enabling the FCA to drive conduct rules that allow responsible lending under the principles of the Consumer Duty. This does not mean sacrificing stability or embracing risk recklessly — it means leveraging data, technology and innovation to create a fairer, more dynamic system.
Reeves and Rathi may not yet agree on the balance between risk and growth but, with bold reforms and smarter regulation, they could make the UK mortgage market fit for the future.
Alex Beavis is a consultant at LHV Bank
This article featured in the February 2025 edition of Mortgage Strategy.
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