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The Bank of England governor has warned that government-backed proposals to water down limits on riskier mortgage lending could trigger more home repossessions and fail to help first-time buyers, even as he announced plans to review the policy.
Andrew Bailey told MPs on Wednesday he was “very happy to have a very open public debate” about the restrictions on UK mortgage lending, but said this should take account of the “better outcomes” the rules had provided in avoiding a surge in home loan defaults during recent shocks.
“They have helped to avoid the creation of a large tail of mortgages, which, when we have the inevitable cyclical downturn or shocks that hit the economy, turn out to be a real problem of the sort we have seen in the past,” Bailey said. “So I think that has been beneficial.”
His comments indicate the BoE is reluctant to further relax restrictions on British banks’ mortgage lending after having done so as recently as November. The BoE’s sister regulator the Financial Conduct Authority proposed going further earlier this month.
UK chancellor Rachel Reeves backed the FCA’s proposal, telling the Financial Times last week she was “absolutely open to looking at ideas that can boost home ownership and help working families get on the housing ladder”.
Reeves and Prime Minister Sir Keir Starmer have urged all UK regulators, including the BoE and FCA, to do more to support its goal of reviving the country’s stagnant economy by easing the burden of rules on business.
Bailey told the Treasury select committee that he supported Starmer’s push to boost growth, but said “there isn’t a trade-off” between this and the BoE’s primary objective of preserving financial stability.
UK mortgage lending is controlled by a mixture of rules from the central bank’s Financial Policy Committee and the FCA, most of which were introduced after the 2008 financial crisis when several banks were bailed out by the state.
The FPC limits banks above a certain size to lending no more than 15 per cent of mortgages worth more than 4.5 times a household’s income. It changed the lending threshold of this limit in November so it applied to fewer banks.
The FCA requires banks to carry out affordability tests on applicants for mortgages to ensure they could still afford the monthly repayments if interest rates rose in future. The BoE ditched a similar affordability test in 2022 because it overlapped with the FCA’s rules.
The FCA said a letter to Starmer this month — in response to a call from the government asking regulators for pro-growth ideas — that it would “begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults”.
Bailey said the potential benefits of easing these limits further would have to be balanced against the gains from keeping them. He also warned it may do little to help first-time buyers whose main obstacle to buying a home is frequently the difficulty in affording the necessary deposit.
“In all the surveys that are done, when you ask what is the major impediment to getting into the mortgage market, it is affording the deposit,” said Bailey.
Nathanaël Benjamin, the BoE’s executive director for financial stability strategy and risk, told MPs there was still “plenty of headroom” before banks hit the limit on mortgage lending “so that isn’t a barrier”, adding that the proportion of first-time buyers in new mortgage lending was at its highest level for 20 years.
He also warned that easing limits without increasing the supply of new homes was likely to push up house prices, which would “make things even more difficult for households to get on the housing ladder”.
