You are here: Home -

Less is more: regulation and reform for the mortgage market – Davies

by: Kate Davies, executive director of the Intermediary Mortgage Lenders Association (IMLA)
  • 15/08/2022
  • 0
It will certainly be nothing new for readers of this article to hear that the rate of homeownership in the UK is stagnating.

Currently, approximately 65 per cent of people in Britain own their home, but this has fallen from a high of nearly 71 per cent in 2003. More concerning for lenders is the drop in the flow of new borrowers into our housing market amongst those aged 25 to 34, falling from a peak of 61 per cent in 1996 to less than 40 per cent in 2016.  

Where there is no natural flow of new first-time buyers (FTBs) who eventually trade up to larger properties, the supply of homes coming on to the market stagnates, making it harder for the next generation of buyers to acquire their first home and realise the financial benefits of long-term home ownership.  

Recent research from the Tony Blair Institute for Global Change argued that mortgage finance rather than housing supply was the main barrier to home ownership. The report proposed a system for mandatory mortgage insurance for all higher-loan to value (LTV) products, based on a model which operates in Canada.  

Lenders don’t agree with this analysis, pointing out that the current market for high LTV products remains vibrant and competitive – and that compulsory insurance would be expensive and cumbersome.  

Instead, lenders are concerned that there are regulatory barriers to FTBs. They welcomed the recent withdrawal of the three per cent affordability test, which had required lenders to stress repayment rates at an unrealistic three per cent above their standard variable rate. This was despite the fact that virtually no FTBs ever pay a standard variable rate (SVR) but pay lower rates which are either fixed or discounted.   

 

Arbitrary limits 

While the removal of the stress test was a step in the right direction, Intermediary Mortgage Lenders Association (IMLA) members are pushing for the second Financial Policy Committee (FPC) recommendation to be reviewed.  

This is the loan-to-income (LTI) flow ratio, which sets a 15 per cent limit on the amount of a lender’s loan book that can be comprised of mortgages at 4.5 times an applicant’s income. In practice, most lenders will not reach the 15 per cent limit, instead reining in higher LTI lending when they approach eight per cent or nine per cent to prevent any chance of exceeding the barrier and attracting regulatory attention. 

While the FPC’s intention with this measure was a sensible desire to prevent an excessive build-up of household debt, the measure has made it harder for borrowers on low incomes to borrow more than 4.5 times their income – even if the loan repayments are affordable.  

 

The five per cent deposit  

Another significant problem lies in the size of deposits.  

According to Barclays Mortgages’ First-Time Buyer index, respondents cited the struggle to save for a deposit as the single biggest obstacle to homeownership (35 per cent).   

This problem has been prevalent in the market for some time but has been intensified by the impact of inflation and the rising cost of living on household savings. According to the Financial Stability Report from December 2021, 83 per cent of renters were unable to raise a five per cent deposit – an unsurprising figure given the cost of the average deposit currently exceeds £60,000.  

As long as housing supply remains tight, house prices will not fall and FTBs will continue to have to find ways of scraping together a rather large sum to secure the property they want to buy. Once they have got a deposit – and are able to afford the regular loan repayments – it seems bizarre that a somewhat arbitrary flow limit can then deny them a mortgage and a first home.  

IMLA will continue to press for this barrier to be reviewed and – if it cannot be logically justified – removed. 

Related Posts

Tags

There are 0 Comment(s)

You may also be interested in