Between high and rising property prices, slower wage growth and lack of housing supply, the challenges faced by aspiring first-time buyers are well-documented.
While increasing the supply of new-build homes has long been on government agendas, the Financial Conduct Authority is also reviewing how regulation can support home ownership, after a letter from government about a “new approach to ensure regulators and regulations support growth”.
Indeed, in March the FCA subsequently outlined to mortgage lenders that “flexibility” was available in its interest rate stress test rule.
According to the regulator, many lenders add a margin to current reversion rates. “With interest rates currently falling this may be unnecessarily restricting access to otherwise affordable mortgages,” the FCA says.
Lenders such as Santander and Accord Mortgages have since lowered their stress rates. According to the latter, borrowers can now take out 15 per cent or £37,000 more on average.
The uplift in borrowing as rates fall could change the type of property that buyers can purchase, says Chris Sykes, technical director at Private Finance, a mortgage broker.
“If they have a £2,000 monthly budget [for the mortgage] and rates were 5 per cent, then perhaps their maximum borrowing is £390,000. But if rates are now 4.5 per cent, then perhaps their maximum borrowing is £420,000, which potentially completely changes the property they could get, from a flat to a house, for example.
“I do feel that things are a lot more flexible than they were a few months ago, and this is helping first-time buyers.
“Rates reducing only helps this.”
But with the amount of time it takes for would-be buyers to save a deposit, Sykes adds: “We won’t see an instant reaction, but with things improving over time, it should lead to more interest from first-time buyers.”
As well as reminding lenders of the flexibility available in its stress test rule, the FCA has said it will open a public discussion on the future of the mortgage market in June.
£61,090
The average first-time buyer’s deposit (Source: Halifax)
“Throughout, we will continue to engage closely with HM Treasury, the Bank of England, including the Financial Policy Committee and the Prudential Regulation Authority,” a letter to City minister Emma Reynolds reads.
With the conversation widening from house building to reviewing regulation, Skipton Building Society’s head of mortgage products, Jen Lloyd, agrees that the regulatory and policy environment has become more amenable to change supporting would-be buyers.
“It’s been really encouraging to have some of the more recent narrative coming out of the regulator and from the government,” Lloyd says.
“I think there is a growing recognition that it isn’t just as simple as building more houses. It’s also thinking about affordability challenges and the regulatory landscape, and how that impacts on those affordability challenges. So I am heartened by what I’ve seen so far.”
Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, likewise describes the steps set out by the FCA as a “step in the right direction”.
Repeating policy proposals that were suggested 12 months prior, an April report from the BSA says there are specific areas of regulation where building societies need more flexibility to help them to support more first-time buyers. This includes reviewing the loan to income flow limit to focus on supporting first-time buyers.
The flow limit ensures that mortgage lenders cap the number of new residential mortgages, with a loan to income (LTI) ratio of at least 4.5 to 15 per cent of their total number of new mortgages within a year.
“An immediate review should be undertaken to assess whether it would be beneficial to adjust the limit and to target mortgages above the cap at first-time buyers,” the BSA’s report says.
Changing the LTI flow limit is also something that Skipton Building Society would like to see. “We’re not talking about looking to completely get rid of it as a limit, but it does need reform,” says Lloyd.
“It’s about being a bit more thoughtful about the type of borrowers that lenders are helping. At the moment, there’s no differentiation; it’s just a flat limit for everybody.
“And it means that there are first-time buyers who are being offered smaller loan sizes, not because they can’t afford to repay them by our own assessments, but because of this rule. And so we don’t think that’s right.
“It’s thinking about it a little bit more granularly, so can we make some changes to the way it’s calculated to think about the different types of demographics that are utilising those limits.”
One lender that has been utilising its LTI flow limit on first-time buyers is Nationwide.
In 2021, the lender launched its ‘Helping Hand’ mortgage whereby first-time buyers could borrow up to 5.5 times their income, and extended the LTI ratio in 2024 to enable borrowing of up to six times income.
It also lowered the minimum income requirement to £35,000 in April for sole borrowers applying for the Helping Hand mortgage, which it had previously increased to stay within the LTI flow limit.
Nationwide’s director of home, Henry Jordan, says that while clarifying the stress test rule is useful, for lenders that are close to the 15 per cent LTI flow limit, the clarification will have little impact on improving support for first-time buyers.
“We have had to take steps in recent months to constrain high LTI lending to stay within the limit. To support more first-time buyers, we believe the Financial Policy Committee should increase its flow limit on mortgages at or above 4.5 times income.
“If the limit were increased to 20 per cent from its current 15 per cent level, we could support an additional 10,000 first-time buyers over the next year.”
Separately to its mortgage rule review, the FCA launched a consultation in April with the PRA, on the FPC’s recommendation to increase the volume of mortgages that a lender needs to make the LTI flow limit apply, from £100mn per four rolling quarters to £150mn. According to the consultation paper:
When the PRA implemented the FPC’s original recommendation, circa 2.3 per cent of all relevant mortgage lending extended in the previous year was exempt from the policy. Currently, only circa 1.5 per cent of mortgage lending is now exempt from the policy.
Increasing the de minimis threshold to £150mn in line with the increase in nominal GDP since Q4 2014, would return the proportion to its original calibration. This would continue to support lending by smaller firms in line with the FPC’s original risk appetite.
Broadhead at the BSA welcomes the uplift, but adds that there remains a need to review the purpose of the overall LTI limit. “It is designed to maintain financial stability and prevent household over-indebtedness.
“While it clearly does limit mortgage lending, equivalent limits do not apply to consumer credit loans, motor finance, credit cards, etc. Utilisation of those credit facilities tends to be at a higher cost too.”
Meanwhile Kate Davies, executive director at the Intermediary Mortgage Lenders Association, says that raising the threshold to £150mn would have “little or no bearing” on the market.
“The figure which urgently needs to be addressed is the 15 per cent cap,” she adds. “The mortgage industry is united in its belief that the LTI flow limits should be reviewed, or even scrapped, but the FPC has not yet shifted its position.
“Many of those applicants who would qualify for a mortgage thanks to relaxed affordability calculations may find they cannot get a home loan anyway, because they need to borrow more than 4.5 times income, and lending at these multiples is still rationed.”
Besides the LTI flow limit, Lloyd at Skipton says another change the building society would like to see is around the Lifetime Isa.
“The withdrawal penalty on the Lisa actually can mean that even if you’re buying your first home, if [the property costs more than £450,000], you have to pay a 25 per cent penalty.
“In practice some people are losing part of their own savings. It’s not just that they lose the 25 per cent government bonus, they lose some of their own capital as well, which we don’t think is right. And so we’ve campaigned to have that withdrawal charge reduced, and we continue to have that conversation with the government about that.
“And thinking about the fact that the product was launched in 2017, and the maximum property value hasn’t been updated since then even though house prices have continued to rise every year, we’ve campaigned on that quite vocally.”
Chloe Cheung is a senior features writer at FT Adviser
