Relaxing lending rules does not mean risky lending – Davies

Some commentators have suggested that allowing lenders more flexibility in this area could open the floodgates to irresponsible borrowing and a wave of risky lending. This is a mischaracterisation of both the market and the regulatory landscape in which it operates. 

Let us be clear: the easing of the LTI cap is not a green light for reckless behaviour. Lenders remain fully bound by Mortgage Conduct of Business (MCOB) Chapter 11, which requires a robust assessment of affordability and demands that loans be demonstrably sustainable for the borrower over the long term. Irresponsible lending is not just bad policy, it is bad business.

No lender has any incentive to offer mortgages that are likely to end in default. 

The LTI flow limit made sense for its time 

The LTI flow limit – originally introduced by the Financial Policy Committee (FPC) to prevent overheating in the market – capped lending above 4.5 times income to just 15% of a lender’s book.

Sponsored

£2.5m paid to help broker clients benefit from greener homes

Sponsored by Halifax Intermediaries

While well-intentioned, the cap has come to function more like a rationing valve, disproportionately affecting first-time buyers, single-income households, and those with moderate means. It has restricted credit access for borrowers who, in many cases, were perfectly capable of managing their repayments. 

The recent modification by consent, allowing lenders to exceed the 15% threshold temporarily, is a welcome and long-overdue adjustment. IMLA, alongside other industry bodies, has long argued for the cap to be raised or scrapped, not as a call to abandon prudence but to inject a dose of realism into a system that has become overly cautious. 

There are some who claim that loosening these constraints will inevitably push up house prices. But such claims overlook the fundamental drivers of the market: supply and demand. House prices vary enormously across the UK, not just regionally, but street by street.

The chronic undersupply of housing remains the primary upward pressure on prices, and until that is addressed meaningfully and at scale, any marginal regulatory tweaks will have limited impact. 

There are enough safeguards in place 

It’s also important to remember that lending decisions are naturally constrained by two very practical factors: earnings and deposits.

While some borrowers may receive help from the so-called Bank of Mum and Dad, most are firmly tethered by their income and savings. This alone places a natural ceiling on how far lending can stretch. 

Relaxation should not be mistaken for recklessness. There are guard rails in place, not least the continued application of responsible lending rules under MCOB. And the nature of the lending market has changed dramatically since the financial crisis.

Today, 95.5% of mortgages are on a capital and interest basis. Only 4.5% are interest-only, a stark contrast to the 39% figure in 2007.

That shift speaks to the industry’s conservatism and suggests that, if anything, the pendulum has swung too far in the other direction. 

Interest-only mortgages, when used responsibly, remain a valid and sensible tool for certain borrowers: those experiencing short-term financial stress, or those with a clear and credible repayment plan. They are not for everyone, and transitioning to a capital repayment basis takes discipline.

But used appropriately, they can provide valuable flexibility, especially for some of those at the beginning of their homeownership journey, dealing with the hefty cost of setting up a home, or younger borrowers in professions where earnings are expected to grow significantly in a relatively short space of time. 

The current landscape is heavy-handed and unbalanced

The Financial Conduct Authority’s (FCA’s) discussion paper on regulatory review reflects an encouraging willingness to explore a more balanced regulatory approach, one that supports wider responsible lending, particularly for first-time buyers.

It acknowledges that the ultra-cautious framework introduced post-2008 may now be holding back capable borrowers and dampening homeownership aspirations. 

Importantly, arrears today remain historically low, under 1% for residential mortgages and just 0.6% for buy to let (BTL). This begs the question: why are we regulating for the 1% at the expense of the 99%?

Since the credit crisis, the industry has adopted a more humane and structured approach to forbearance and arrears management. Possession is rightly treated as a last resort, and lenders are well-versed in supporting borrowers through periods of financial difficulty. 

The bottom line is that we must avoid conflating greater regulatory flexibility with a weakening of standards. The goal is not to remove the brakes, but to release the handbrake enough to allow capable borrowers to get moving.

At a time when too many are locked out of homeownership, now is not the time for fear; it is the time for proportionate, intelligent reform.