The genie is out of the bottle: we must capitalise on it – Bell

Whether we’re talking about capital ratios or protecting the cash ISA, the announcements are aimed at reducing the regulatory burden on banks, building societies and other financial institutions, in order to stimulate economic growth.

As the Chancellor has made clear, getting the housing market moving is a key part of that mission, reflected in the important changes to the loan-to-income (LTI) flow cap.

Until now, the 4.5 times LTI cap applied to all lenders completing over £100m in new residential mortgages per year. As of last month, the threshold has been raised to £150m, and, in addition, lenders can apply for a temporary waiver, allowing them to avoid the cap on a case-by-case basis.

The move is designed to increase the availability of mortgages to creditworthy borrowers, particularly first-time buyers, who, because of the cost of living and increasing rent, are struggling to save a big-enough deposit or access an affordable mortgage to allow them to buy the home of choice.

At the same time, it is intended to stimulate growth among the smaller and mid-sized lenders, removing one of the barriers to them supporting first time buyers by encouraging higher-LTI lending.

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It is certainly a positive indication of the ability of the regulators to implement change in the market. It is a welcome and pragmatic boost to early-stage challenger lenders, and one we have been calling for, especially when related to fixed-for-life mortgages, where interest rate risk is removed from the customer.

However, it is not a game-changer.

Tinkering around the edges

The reality is that the vast majority of the sector is unaffected by these changes.

Smaller and early-stage lenders sit below the lending volume threshold, so the cap does not apply, while their larger competitors are often more conservative, rarely lending enough to get anywhere near the 15% cap. Although, some may see the cap waiver as an opportunity to offer more higher-LTI products. The changes remove restrictions for the mid-tier lenders who are growing, but still do not make a huge difference to those customers who might need to borrow at a greater ratio than 4.5 times their income.

As such, despite best intentions, the changes won’t materially increase lending to first-time buyers, with a knock-on impact on the government’s plan to stimulate economic growth through the housing market.

New homes can be built, but if buyers can’t access mortgages to purchase them, we won’t see the benefit and housebuilding rates will fall.

Affordability is a bigger hurdle

Also, when lending to early-stage customers, it is often the affordability tests that restrict borrowing rather than LTI. Assessing affordability is a sensible test and longer-term fixes do allow lenders to avoid applying stress tests to these checks, which does rightfully help and allow borrowers to access larger loans.

Even if the flow cap is raised from 15%, the regulator would be keen to stipulate that the overall market cap remains, suggesting that it doesn’t expect high-LTI lending to become more mainstream regardless.

The LTI change will help second- and third-time buyers realise their next home sooner, where often the loan to value (LTV) is lower, and their career and income are in a more mature place. This change may allow second- and third-time buyers to avoid an additional move if they can use increased income multiples to access higher borrowing and move further up their aspirational property ladder.

That acknowledged, the news does demonstrate the potential for the regulator to relax some of the stringent rules that have prevented innovation and restricted the market since the 2008 crash for good reason at the time.

To that end, this change is a welcome one, but, with the review ongoing, we still need regulators to go further and take bolder action.

A combination of lending options

As well as a greater availability of high-LTI loans, there should be exemptions to the cap altogether for fixed-for-life mortgages if we are serious about driving the ability of first-time buyers to get on the ladder and removing interest rate risk from the wider borrowing community.

Products that align with the government and regulator’s view of increasing options, and access to finance for borrowers and supporting housebuilding without compromising on financial stability – such as long-term fixed rates – are vital here and should be considered as such.

Now that the regulator has introduced some leniency, it will be difficult for it to put the genie back in the bottle.

It is up to us, lenders and brokers, to secure the changes we need to push the right innovation forward, improve the market for all and use the change appropriately.