Should mortgage lending rules be relaxed to boost the UK economy?

Mortgage lending rules could be relaxed to help more first-time buyers onto the property ladder and boost the economy.

Chancellor Rachel Reeves has been seeking ideas from financial regulators on how to boost the economy amid concerns about the UK’s prospects due to higher taxes announced in the Autumn Budget.

It comes as UK GDP came in at just 0.1% for November.

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One idea that has reportedly been put forward by regulators is relaxing the rules on mortgage lending so that banks would be able to provide more high-loan-to-value loans.

The Financial Conduct Authority (FCA) said in a letter to the government that it would "begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults."

High house prices and rising mortgage rates in recent years have locked many buyers out of the property market.

There are also worries that the drop in stamp duty thresholds in April could push up purchasing costs and make it even harder to own a home.

Charles Roe, director of mortgages at UK Finance, said: "Reviewing the mortgage lending rules would help with affordability issues, not just for first-time buyers but also those looking to move further up the housing ladder.

“Banks will always lend responsibly but the current rules are restricting the number of people who can get a mortgage and so could be relaxed.”

What changes are being proposed to mortgage lending?

Currently, banks are limited to only lending 15% of their mortgage book to those whose property is worth 4.5 times their income.

That can make it hard to secure large mortgages and buy a property, especially if you have a low-paid job.

Additionally, banks have to follow strict affordability tests to make sure borrowers can afford their loans.

Financial regulators are reported to have suggested relaxing these rules to boost lending.

Changes could also include letting banks consider wider forms of proof of affordability such as rental payments, which aren’t always factored in by lenders.

That can mean a tenant is often paying higher rent than what a mortgage would cost but is denied a loan as the payments don’t count.

There does appear to be industry support for change.

“Relaxing mortgage lending rules could help tackle affordability challenges that extend beyond first-time buyers and impact a wide range of potential homeowners,” say Mark Eaton, chief operating officer for April Mortgages.

“The current rules are overly restrictive, and more needs to be done to stimulate the market and create opportunities for those locked out of homeownership.

"We support the spirit of the concept but only if we ensure borrowers are protected from the future risks of increased monthly mortgage payments often posed by short term fixed rate products.”

Ross Lacey, director of Fairview Financial Management, highlights that more activity in buying and selling homes will also create a greater tax take for the government, both in terms of stamp duty but also businesses and individuals involved in the property market such as lenders, brokers, estate agents, solicitors and surveyors paying more in tax.

What are the risks of relaxing mortgage lending rules?

The main fear among many in the mortgage industry is a repeat of the 2008 financial crisis, where buyers ended up with mortgages they couldn’t afford and defaulted due to lax lending rules.

Eaton adds: “Concerns about higher borrowing levels leading to payment shocks could be mitigated by encouraging borrowers to opt for more modern longer-term mortgage products as is the case in Europe and more recently introduced into the UK.

“These options would reduce the risks associated with end-of-term rate adjustments and provide greater financial stability for homeowners.”

There are other risks though.

Rohit Kohli, director at The Mortgage Stop, also warns that boosting lending may push up house prices due to rising demand, while addressing supply may be a better route.

He says: “To truly stimulate the property market and help first-time buyers, the government must tackle the root causes of the supply problem. Too many developers are sitting on land with planning permission, and there’s an unacceptable number of vacant properties that could be put to use.

“While these proposals may give buyers more borrowing power, they echo the principles of schemes like Help to Buy, which improved access but didn’t necessarily lead to long-term affordability. A balanced approach addressing both supply and demand is needed to have a lasting impact.”