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UK financial regulators have proposed allowing banks to lend more mortgages to first-time buyers with smaller deposits and lower incomes as they respond to government calls for more risk-taking to boost the economy.
The proposals could lead to the lifting of limits on riskier mortgage lending that were imposed on banks in response to the heavy losses of the 2008 financial crisis, when many lenders had to be bailed out by the government.
Nikhil Rathi, chief executive of the Financial Conduct Authority, told Keir Starmer this week that the watchdog was considering diluting some of these restrictions to allow banks to increase their “responsible risk-taking” in the mortgage market, according to a person briefed on the letter.
The response was also sent to chancellor Rachel Reeves and business secretary Jonathan Reynolds.
The government has called on the FCA and other UK regulators to present ideas for rule changes that could increase risk-taking and investment in the economy, as the prime minister seeks to deliver on his promise to increase growth.
Starmer told investors last year he would “rip up the bureaucracy that blocks investment” in the UK, and Reeves called in regulators this week to explain how they intended to work to boost growth.
The FCA proposals, first reported by the Times, do not include specific detail of any planned rule-changes but suggest consulting on whether mortgage lending rules could be eased to help more people own their homes now that default rates have fallen to low levels.
UK mortgage lending is controlled by a mixture of rules from the FCA and the Bank of England. These restrict banks from having more than 15 per cent of their mortgage loan book in loans worth more than 4.5 times a borrower’s income.
The FCA could also water down affordability tests to see if borrowers would be able to cope with future interest rate rises, and allow them to use evidence of past rental payments to borrow more.
Another area that could be examined is the amount of capital banks need to support mortgages worth at least 90 per cent of the property value against which they are secured.
The Treasury said Reeves would examine the FCA proposals and work closely with the financial regulator to develop them further.
It said Reeves believed that since the financial crisis there had been overly onerous interventions by regulators to minimise risk at the expense of economic growth.
“The chancellor has said she is not going to go back to the excessive risk-taking of the financial crisis, but she is committed to rebalancing the system over time,” the Treasury added.
The idea of easing mortgage rules was welcomed by Charles Roe, director of mortgages at trade body UK Finance. “Reviewing the mortgage lending rules would help with affordability issues, not just for first time buyers but also those looking to move further up the housing ladder,” he said.
Richard Donnell, executive director at property portal Zoopla, said the “big hurdle” preventing more people from getting a mortgage was the stress test of affordability, which requires banks to test if borrowers can cope with a rise in borrowing costs.
“This has come at the cost of pricing more people out of the market,” said Donnell, adding that before the recent rise in interest rates, lenders typically stress-tested if borrowers could afford a rate of about 6 per cent and that had risen as high as 8-9 per cent.
But Sir Vince Cable, former Liberal Democrat business secretary in the 2010-2015 coalition government, said relaxing mortgage requirements could be highly risky.
“It seems ominously similar to trends two decades ago which culminated in the mad 125 per cent Northern Rock mortgages and self-certification, which did not end well,” he said. “Even if there is no systemic risk, this would add demand without supply — we know where that leads.”
Some City of London figures also voiced concerns over pushing regulators to prioritise growth alongside financial soundness.
“Mitigating the build-up of risk within individual firms across the financial markets generally without stifling growth has always been the role of regulators,” said Romin Dabir, a financial regulation partner at law firm Reed Smith. “Some might say that a relentless focus on one of these objectives could lead to the undermining of the other.”
Another idea put forward by the FCA is to lift the £100 spending limit on contactless card transactions, which was imposed due to fears that it could open the door to fraudsters.
The FCA declined to comment.
Starmer, Reeves and Reynolds wrote to 17 regulators before Christmas, telling them to set out potential pro-growth measures which could help boost the economy, with a deadline of January 16 to respond.
On Thursday, Reeves met half a dozen of those watchdogs, telling them that they needed to deliver a “mindset shift on regulation” instead of “excessively focusing on risk”.
The FCA was not at that meeting but is expected to meet Reeves in coming days.
