The government is applying pressure on the City regulator, the Financial Conduct Authority (FCA), to loosen mortgage rules to increase economic growth and home ownership across the UK.
The move to “simplify responsible lending” for property purchases is part of a range of proposals put forward by the FCA in an attempt to prove that the watchdog is not standing in the way of the Labour cabinet’s “growth mission”.
Affordability checks were introduced by the Bank of England (BOE) to avoid a repeat of 2008 credit crunch, it later introduced stress test rules that required lenders to check whether homeowners could afford mortgage payments at higher interest rates, although the BOE scrapped the test to repay at higher interest rates in 2022. At the time it said that other rules, including the current cap on loans based on annual income, was likely to play a stronger role in guarding against an increase in household debt.
However, under the latest proposals, regulators could end up reviewing how much first-time buyers are allowed to borrow and issue more loans to customers with smaller deposits. At the moment, banks are only allowed to lend 15% of their total mortgage loan book to people who are borrowing at least 4.5 times their annual salary.
Some members of the property industry have argued that these latest proposals could lead to a further jump in house prices and result in borrowers taking on more debt than they can afford with one seasoned commentator remarking “There is a risk that enabling people to borrow more will once again send house prices skyrocketing…….. the theory is good but the practice could have unintended consequences.”