There is a chance for the mortgage market to review the tightened rules brought in after the global financial crisis, but proposed changes are unlikely to address all challenges, lender representatives have said.
Mortgage Solutions spoke with lenders before and after the Financial Conduct Authority (FCA) said it would consider simplifying mortgage lending rules after the government asked the regulator to support more access to homeownership.
Looser LTI could push up house prices
Jeremy Duncombe, managing director of Accord Mortgages, said as a business, the lender understood there were not enough solutions for borrowers in the current market, especially those struggling to get a mortgage.
He added: “The rules lenders must follow were tightened after the 2008 global financial crisis, and have made the market more resilient to further shocks.
“However, we feel there is now a golden opportunity to review those rules and identify what could be done to prudently allow borrowers more scope. This could include, for example, increasing the loan-to-income (LTI) limit governing what percentage of their overall loans lenders can offer at or above 4.5x income. This currently stands at 15% and is often seen as a barrier to lenders.”
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Duncombe said this might have unintended consequences, however.
He added: “We do need to be aware though that there are wider issues [that] this would not solve, and may even exacerbate. Increasing the LTI limit could potentially increase the demand for housing even further by making more borrowers eligible to buy, pushing up house prices, so the government must consider the longer-term view when deciding the best way forward.
“There are also other challenges borrowers face, such as having the ability to save a big enough deposit – which is why we launched our 5K Deposit Mortgage last year and have recently also extended the product to those buying flats, and we continue to look for ways to innovate in this space.
“However, these issues are bigger than one lender alone – a concerted industry and government effort, and a willingness to adapt, are needed to solve them.”
No ‘silver bullet’
Jonathan Stinton, head of intermediary relationships at Coventry Building Society, said there was “no silver bullet” that would help more people onto or to move up or down the property ladder, but said it would “take a combination of things to make a real difference, and right now, current policies and rules may have gone too far and make borrowing and getting on the housing ladder harder, not easier”.
Referring to the proposal to reduce the tax-free cash ISA allowance from £20,000 to £4,000, Stinton said the change would “boost share ownership in the UK, but it’ll hit mortgage lending if it goes ahead”.
He added: “Savings balances fund mortgages – across all lenders, but particularly for the mutual sector – so if there’s less money saved in cash ISAs, lending could get more expensive, meaning it’s borrowers who ultimately pay the price.
“The decision-makers need to consult and carefully consider the full implications to borrowers before they even think of touching the cash ISA.”
Stinton also said LTI rules needed attention.
“Lenders already have strong affordability checks in place, so giving them more flexibility in how they assess borrowers could help widen access without compromising responsible lending.
“Particularly for first-time buyers at the start of their career, earnings are likely to rise quite quickly, making the mortgage more affordable over time,” he added.
Stinton named stamp duty as another area that could be looked at, something he and Coventry Building Society have advocated for over a number of years.
He said: “Stamp duty is like a tariff on moving home and is a real disincentive for people to downsize and free up family homes for the next generation. A flat stamp duty might encourage greater social and generational mobility and generate more economic activity and tax revenue in the long run.”
Stinton added: “No conversation about homeownership is complete without addressing supply. Housebuilding needs to be at the front of the government’s agenda, ensuring buyers at every stage of the property ladder have options to move up and down freely.
“None of the changes alone will fix the problem; they’re all pieces of a much bigger puzzle. Only by taking a holistic view can we hope to create a mortgage market [that] truly works for everyone.”
FCA proposing more flexibility
Reacting to the latest update from the FCA saying it would look at alternative ways of stress testing borrowers, simplifying mortgage rules and making it so people could discuss their options outside of regulated advice, lenders welcomed the idea of more flexibility around lending.
Tony Hall, head of business development at Saffron for Intermediaries, said: “The FCA’s encouragement of greater flexibility in mortgage stress testing is a welcome step [forward] in improving access to lending, particularly as interest rates ease. However, while the adjustments may help creditworthy borrowers secure financing, it’s essential that lenders apply these flexibilities responsibly to avoid overleveraging and financial strain.
“Crucially, access to high-quality mortgage advice must remain central to any solution. Mortgage brokers play a vital role in helping borrowers make informed decisions as lending criteria evolve. Regulation should not prevent people who can afford a loan from getting the loan size they need, but any changes must be carefully considered to avoid higher default rates, especially if borrowers are navigating options without an adviser’s support.”
Mark Eaton, COO at longer-term mortgage lender April Mortgages, said: “While regulatory flexibility is a positive step, it’s equally important to ensure borrowers remain protected from the risks of future interest rate rises and the higher mortgage costs that could follow.
“Stress rates are designed to do exactly this and have played an important role in ensuring borrowers were able to in part absorb the payment shocks they have seen recently when exiting short-term fixed rate products.
“There are already options available to reduce the impact of stress testing and provide long-term payment stability, such as mortgages with fixed terms of 10 years or more. Greater regulatory support to expand access to these products across the UK would be a welcome move, offering borrowers more choice and financial security in an evolving market.”
