Stay informed with free updates
Simply sign up to the UK financial regulation myFT Digest — delivered directly to your inbox.
Rules restricting British mortgage lending will be eased under plans announced by the financial regulator on Friday to make it easier for people to buy their own home.
The Financial Conduct Authority said it was close to launching a call for evidence on how to loosen rules requiring banks to stress test whether borrowers can cope with higher interest rates.
The regulator also outlined plans to start a “public debate” in June on the mortgage market and to launch a consultation in May to present “early ideas” on how to make it easier to remortgage, get advice and reduce the term of a home loan.
The proposals, which will chip away at rules designed to prevent a future financial crisis, are part of the FCA’s response to prime minister Sir Keir Starmer’s call for regulators to focus on pro-growth measures.
The FCA’s mortgage proposals were welcomed by chancellor Rachel Reeves, who said they would “kick-start economic growth and help working families get on the housing ladder”.
The watchdog’s chief executive Nikhil Rathi said: “We are taking swift action to support people in getting the keys to their own home.” He added that the regulator wanted lenders to use the flexibility in its existing stress testing rules “to help more people become homeowners”.
However, some officials worry that ditching many of the rules introduced after the 2008 financial crisis to prevent excessive risk-taking in the mortgage market could expose taxpayers to the risk of having to bail out major banks again.
Bank of England governor Andrew Bailey told MPs in January that any reforms to mortgage rules should take account of how they have helped to avoid “a real problem of the sort we have seen in the past” in the next cyclical downturn or economic shock.
Rathi has also said that easing controls on mortgage lending could increase defaults and repossessions of homes, calling for politicians to define an acceptable level of harm to consumers as he warned that more would “go wrong” when regulations are loosened.
Mortgage lending in the UK is controlled by a mixture of rules from the FCA and the BoE, most of which were introduced after the financial crisis.
The FCA requires banks to carry out affordability tests to check if borrowers would be able to keep up repayments if interest rates rise.
The watchdog said many lenders used a higher interest rate in the stress test than the rate they were actually offering, which “may be unnecessarily restricting access to otherwise affordable mortgages” especially as interest rates were falling from their recent peak.
The BoE’s Financial Policy Committee limits banks above a certain size to lending no more than 15 per cent of mortgages at ratios of 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 said the planned public debate on mortgages in June would consider “risk appetite and responsible risk-taking, alternative affordability testing and product innovation, lending into later life and consumer information needs”.
The regulator added that it would “also consult to retire outdated regulatory guidance, such as its maturing interest-only mortgage guidance”, adding that this overlapped with its new consumer duty rules requiring financial institutions to ensure they treat customers fairly.
Rathi said in a letter to City minister Emma Reynolds published on Friday that “consumer protection and responsible lending will remain core principles” in any rewriting of its mortgage rules, but he added that “conduct and firm culture is far stronger now”.
