UK Finance makes ‘blow up’ warning over mortgages

A “carefully measured” relaxation of mortgage lending regulations could assist more first-time buyers in entering the property market without triggering a substantial rise in payment defaults, a banking and finance industry organisation has suggested.

UK Finance stated its research indicates that a moderate expansion in lending, facilitated by reduced stress rates, could enhance mortgage accessibility – especially for first-time purchasers – without materially increasing arrears.

Financial institutions conduct stress assessments to consider the effect of probable future interest rate increases on a borrower’s mortgage repayments when establishing whether a home loan is affordable.

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UK Finance noted that, despite some dramatic interest rate hikes since 2022, the majority of borrowers transitioning from fixed-rate mortgages encountered rates beneath the thresholds they were initially stress-tested against.

More latterly, the Bank of England base rate has been following a declining trajectory.

Amongst borrowers currently paying above their original stress test rate, 1.75% are presently in arrears, contrasted with merely 0.21% of those paying below that benchmark, UK Finance reported.

Whilst lending regulations have contributed to maintaining low arrears, numerous prospective borrowers have discovered their capacity to obtain a mortgage restricted, UK Finance observed.

Nevertheless, any relaxation of rules that considerably increases demand without a matching rise in housing provision would probably push up property prices, adversely affecting affordability, it warned. In June, the Financial Conduct Authority (FCA) initiated a “public conversation” regarding the mortgage market’s future as part of efforts to assist consumers with their finances and bolster economic growth.

The consultation period for its discussion paper concludes on September 19.

The FCA is examining whether additional measures could support first-time buyers, long-term tenants aspiring to enter the property market, and older individuals who possess substantial home equity but may face income limitations.

The watchdog has confirmed it will prioritise consumer and market protection before suggesting any regulatory amendments.

Prospective modifications to lending criteria that could enable broader access to mortgage funding might involve accepting heightened risks of future payment difficulties.

Eric Leenders, managing director of personal finance at UK Finance, commented: “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.”