How Labour plans to ease mortgage rules could help you borrow more

Strict mortgage rules put in place after the 2008 financial crash may be about to be relaxed to allow people to borrow more money.

The Chancellor is continuing a drive to increase growth, and part of the measures being discussed, according to reports, centre around relaxing the rules governing mortgage lending.

This could grant greater flexibility for lenders to allow “responsible risk-taking” from borrowers.

It comes in response to a request made to UK regulators from the Chancellor on Thursday to come up with ideas for growth and move away from the primary goal being avoiding risk.

This request happened during a meeting at the Treasury shortly after figures showed the economy grew by 0.1 per cent in November, below expectations for 0.2 per cent growth.

Should the rules become relaxed, the result is likely to be that people will be able to borrow more. We look in more detail at how this might work.

What is being discussed?

At the moment only a maximum of 15 per cent of mortgage lenders’ total lending can go to people whose property is worth 4.5 times their annual salary – the remaining 85 per cent has to be people borrowing less in relation to a borrower’s income. But according to a report in The Times, this rule could be relaxed.

Also up for discussion is stress testing, a safety valve introduced after the 2008 crash to make sure people could afford their mortgage and bills even if rates go up by several percentage points. This rule could also be relaxed to less stringent levels.

Regulators are also thought to be considering altering affordability tests to include evidence of previous rental payments rather than going just on a person’s income.

This would be a popular move, as currently a renter who has paid their rent for say five years without missing any payments may not be given a mortgage for the same amount due to more stringent affordability calculations for buying compared with renting.

Lenders may also be given more flexibility to lend to people with lower deposits. This is not expected to make much difference, according to experts, as products for these people exist already, albeit at generally very high interest rates.

Why did the rules become more stringent?

After the 2008 Credit Crunch Governments all over the world were left bailing out banks in financial straits caused largely by irresponsible lending. This happened when borrowers on low-interest rates or with small or non-existent deposits were unable to pay their mortgages when interest rates increased, which ultimately lost banks a lot of money.

Pre-2008 a highly unregulated mortgage market allowed people to volunteer to banks what their income was without having to prove it. Some people also borrowed more than 100 per cent of a property’s value to cover the cost of furniture and other bills.

After the crash, a crackdown meant that people not only had to prove income, but they had to pass far stricter affordability calculations.

Some would argue that the rules – which are a reason why we are seeing so few repossessions today, despite the impact of Covid and higher interest rates – served a purpose, but are now stifling the housing market, and therefore growth.

Who will this all help?

Some experts say that a relaxation of the rules could help borrowers.

“Introducing a bit of sensible risk is a good thing,” says Andrew Montlake, a spokesperson for Coreco mortgage lenders.

“It will give lenders some room to help more people get the borrowing they need.”

First-time buyers will see an immediate impact, but then there will be a trickle effect on other parts of the market too. And ultimately, we could all benefit as a busy (or busier) housing market is a quick boost for a stuttering economy.

“People moving from a flat to a house have found it challenging, because of the growth in the gap between flat and house prices ever since the pandemic,” says Beveridge, of Hamptons estate agency.

“Since the pandemic flat prices haven’t risen so much, while house prices shoot up in value. Trading up is a lot more expensive than it used to be. A relaxation of the rules will help more people afford that gap”.

There are also some limitations to what a relaxation of the rules could do, particularly in expensive areas such as London.

Richard Donnell, research director for the Zoopla property portal points out that the lending rules aren’t a big problem “outside southern England as prices are lower and the stress test is a less expensive hurdle”.

He adds that the proposed changes “will help at the margins but are unlikely to transform access to the market,” especially in the south of England.

Will house prices go up?

Potentially this could happen in some places in south England, according to Aneisha Beveridge, research director at Hamptons estate agency, though she adds these increases will be limited by affordability, as prices are very high and allowing people to lend a bit more isn’t going to make them suddenly affordable.

What it is likely to do is boost transaction numbers, she says.

“The volume of transactions has taken a real knock since the financial crisis,” she says.

“A lot of that is down to the mortgage rules. Pre crash we saw 1.6m transactions, last year which was a relatively busy one for the market, saw 1.1m transactions,” she adds.

Would the changes lead to higher interest rates?

No, according to Monlake, given that lenders are in a competitive environment.

The January bounce in the property market – where people list in greater numbers as they have been holding off until the New Year – hasn’t happened to the extent that the property market was hoping for.

This has meant lenders will be looking to do more deals through competitively priced rates, he says.

What are the risks of relaxing the rules?

If borrowers borrow more, then first time buyers on two-year fixed-rate deals could find it tricky to remortgage if house prices go down, and they have borrowed more than their house is worth.

Alper Kara, professor of banking and finance at Brunel university, said the move carries “significant risks” that could undermine financial stability, which could recreate the conditions that led to the 2008 financial crisis.

“In its aftermath, the government spent billions of taxpayers’ money to rescue banks resulting in austerity measures whose repercussions are still felt today”.

He adds that easier access to lending “could also inflate property prices, further worsening affordability and encouraging speculative investments. Relaxing affordability tests also risks compromising consumer protections, leaving borrowers burdened with unsustainable debt. In my opinion, this could be a recipe for another financial disaster. Instead of loosening lending standards to address housing issues, we need to focus on building more affordable housing to tackle the root of the problem effectively”.

Jane King, an independent mortgage broker added, “Trying to saddle [first time buyers] with more debt just to effect some short term growth is madness and will just push house prices up further.”