Calls for relaxed lending regulations could pave the way for numerous first-time homebuyers to enter the housing market by enabling them to secure larger mortgage amounts.

The Financial Conduct Authority (FCA) has announced plans to evaluate the lending capabilities of banks, aligning with the government’s initiative to stimulate economic growth. Similarly, the Bank of England’s financial policy committee received directives from Chancellor Rachel Reeves to enhance accessibility to homeownership.

This raises questions about the implications for the broader housing market.

Real estate analysts anticipate that the FCA will reconsider its stress testing measures, which ensure that borrowers can manage their loans even if interest rates rise. Currently, banks must conduct stress tests at a rate 1 percentage point above the anticipated Bank of England base rate. For instance, if a borrower’s mortgage rate is 4 percent and the forecasted Bank rate is 5 percent, the stress test would ascertain whether they could afford a 6 percent payment.

Charles Roe from UK Finance commented that eliminating this stress test could streamline the rules. He noted, “It is quite complicated and limits the number of individuals eligible for mortgages.”

The number of first-time buyers has notably decreased from 351,260 in 2019 to 287,060 in 2023, as reported by UK Finance. Additionally, a survey conducted by the Building Societies Association revealed that 48 percent of 2,000 adults polled cited inadequate borrowing capacity as a significant obstacle to purchasing a home.

Historically, stress testing measures were even stricter. Prior to August 2022, banks were required to evaluate whether borrowers could sustain payments at rates 3 percentage points above their lender’s standard variable rate (SVR), which tend to be higher than fixed rates. The removal of this requirement could enable an additional 30,000 individuals to borrow more, according to the Bank of England.

David Fell from Hamptons estate agency indicated, “If all lending restrictions were lifted, it could potentially generate an additional 100,000 to 150,000 transactions annually, benefiting both first-time buyers and existing homeowners looking to move.”

Financial institutions assert that the relevance of the stress test has diminished, as mortgage rates, which surged from 2021 to 2023, are now on a downward trend. For example, the average two-year fixed mortgage rate increased from 2.34 percent in December 2021, while the Bank rate was at a historic low of 0.1 percent, to 6.85 percent in August 2023, when the Bank rate reached 5.25 percent.

Currently, the average two-year fixed rate stands at 5.51 percent, with the Bank rate at 4.75 percent and projected to decline this year.

The anticipated market impact: While a reduction in mortgage rates may lessen the effect of eliminating the stress test, it could still provide a slight market boost.

Increasing Loan Limits

Since 2014, banks have been restricted to offering loan-to-income ratios of 4.5 or more to just 15 percent of borrowers to mitigate the risks associated with loaning practices that contributed to the financial crisis of 2007-08.

Paul Broadhead from the Building Societies Association is hopeful that the Bank of England will reassess this limit as part of the government’s initiative to promote homeownership.

According to Nationwide Building Society, the average property purchased by a first-time buyer in the final quarter of last year cost five times their average salary, rising from 4.8 times in early 2014 and 2.3 times in 1994.

In London, first-time buyers faced an average property price that was eight times their salary, compared to 8.1 times in 2014 and 2.8 times in 1994.

Felicity Holloway from Moneybox Mortgages remarked, “Many renters manage high rental payments and save for deposits but are often hindered from homeownership due to strict income multiple regulations that don’t reflect their ability to pay.”

Many traditional lenders typically allocate their higher income ratio loans to individuals with larger deposits or higher incomes. For instance, HSBC will lend up to 5.5 times income for those earning £100,000 or more.

Broadhead suggested, “If lenders could offer more substantial loan-to-income loans, it would open up opportunities. The Bank of England could stipulate that any additional lending quotas be directed to first-time buyers.” The anticipated market impact: Enabling first-time buyers to borrow more could assist them in entering the market, thereby lifting property values.

The Possibility of Interest-Only Mortgages

The availability of interest-only mortgages has largely been restricted to wealthier individuals since 2014, as lenders require evidence of borrowers’ plans to repay the principal at term end. For example, Halifax mandates an annual income of £75,000 (£100,000 for joint applications) and a minimum 25 percent deposit for those seeking such mortgages.

The Building Societies Association advocates for government policies that would facilitate more partial interest-only and partial repayment loans, allowing first-time buyers to pay a 5 or 10 percent deposit and maintain a 75 percent loan-to-value repayment mortgage, while keeping the remaining 20 or 15 percent as interest-only to lower monthly payments.

For example, a £200,000 repayment mortgage over 25 years at 4 percent costs £1,056 monthly; however, if £40,000 is interest-only, the monthly payment would decrease to £978. The potential market impact: This could assist first-time buyers, although lending caution may still prevail among banks.

Potential Rise in Property Values

Hamptons noted that during the stamp duty holiday from July 2020 to June 2021, when buyers only paid duty on properties above £500,000, average house prices climbed by 11 percent, from £236,687 to £263,552, as first-time buyers surged into the market.

An increase in property prices may benefit existing homeowners, especially those downsizing in more affordable areas, but it could also compel first-time buyers to incur even greater debt.

James Daley from Fairer Finance cautioned against such risks, stating, “Ultimately, it comes down to affordability. There is a crucial need to avoid creating situations where individuals overextend themselves financially.”

“By continually attempting to stimulate the housing market, we are not addressing the fundamental issue that home prices are excessively high.”

The FCA indicated that any modifications to the rules will go through a consultation process.