Last summer, the new government came into power with five manifesto ‘missions’ to rebuild Britain. The first mission was to secure the highest sustained economic growth in the G7: “with good jobs and productivity growth in every part of the country making everyone, not just a few, better off.” Given the current global and domestic economic challenges, that mission looks improbable, if not impossible. However, the housing market is one part of the economy that could generate real growth. Whether or not the target 1.5 million new homes will be built by 2030 – which would be a major economic stimulus – remains to be seen. But growth could be achieved by altering some of the restrictions around mortgage lending to make housing finance more readily available. In the UK, most young adults aspire to own their own home. According to research published by the Building Societies Association in April, 65% of prospective first-time buyers cite mortgage affordability as the greatest barrier to buying a home, while 42% say the inability to get a large enough mortgage is the biggest obstacle. Early this year, the government asked the Financial Conduct Authority (FCA) to seek ways of relaxing regulation to promote economic growth. In March, the FCA declared that lenders were being too stringent in the way they ‘stress test’ mortgage applications, with many checking that borrowers could still afford their mortgage if it were priced at their Standard Variable Rate plus a margin of up to 3%. Some of the larger lenders have recently begun soften their approach to stress testing, which they calculate should allow them to lend to tens of thousands more first-time buyers. This is a significant step in the right direction. The additional 3% stress test was introduced by the Financial Policy Committee in 2014. It was removed in August 2022 – and while some lenders might have wanted to remove it from their underwriting at that point, the impact on interest rates of the Truss/Kwarteng “fiscal event” will have given many pause. The fact that lenders are now reviewing their approach is an encouraging sign that the extreme volatility created nearly three years ago has settled down. The other measure introduced by the FPC in 2014 was the Loan to Income (LTI) lending limit, which remains in force. It restricts lending at or above 4.5 times income to no more than 15% of mortgage lenders’ advances if they lend more than £100m a year. This effectively rations the number of loans that are available to borrowers who have already satisfied the lender’s affordability tests. Removing arbitrary restrictions would boost homeownership – and growth 08 MORTGAGE NEWSLETTER Kate Davies Executive Director Intermediary Mortgage Lenders Association
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