A carefully measured relaxation of mortgage lending criteria could open the door for more first-time buyers without triggering a significant rise in loan defaults, a leading banking and finance body has suggested.
UK Finance's analysis indicates that a modest increase in lending, facilitated by reduced stress rates, could enhance mortgage accessibility, particularly for those entering the property market for the first time, without substantially increasing arrears.
Lenders currently employ stress tests to assess a customer's ability to manage mortgage payments under potential future interest rate hikes, thereby determining affordability.
Despite the sharp interest rate increases observed since 2022, the majority of borrowers transitioning from fixed-rate deals have encountered rates below their initial stress-tested thresholds.
Furthermore, the Bank of England's base rate has recently shown a downward trend.
The body highlighted that among borrowers now paying above their previous stress test rate, 1.75% are currently in arrears, a stark contrast to just 0.21% of those whose rates remain below that threshold.
While existing lending rules have successfully kept arrears low, UK Finance noted that many prospective homeowners have found their ability to secure a mortgage severely restricted.
However, the organisation cautioned that any significant loosening of these rules that boosts demand without a corresponding increase in housing supply would likely inflate house prices, thereby negatively impacting overall affordability.
In June, the Financial Conduct Authority (FCA) launched a “public conversation” on the future of the mortgage market as part of work to help consumers navigate their finances and to support economic growth.
Feedback on its discussion paper will close on September 19.
The FCA is looking at whether there is more that can be done to help first-time buyers, people who are long-term renters with aspirations to get into the housing market, as well as people in later life who may have significant equity in their home but who “may be income-constrained”.
The regulator has said it will focus on how consumers and the market are protected before recommending any rule changes.
Potential changes to lending rules enabling more people to access mortgage finance could involve accepting a greater risk of future arrears.
Eric Leenders, managing director of personal finance at UK Finance, said: “The FCA has started a very welcome and important debate on whether mortgage affordability tests can be revised to support higher levels of homeownership.
“We have already seen lenders make changes to help more people get access to mortgage finance. Our analysis shows that a carefully measured easing of stress test rules can responsibly allow more people – especially first‐time buyers – into the mortgage market without leading to a significant increase in arrears levels.”
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