Rachel Reeves is sweeping aside rules put in place to protect homeowners in the wake of the financial crisis in a move that experts warn could sow the seeds for a future catastrophe.
The move by the Chancellor is designed to help first-time buyers get on the property ladder and families to upsize.
But fears are growing that it could make buying a home even less affordable by driving up house prices and encouraging borrowers to overextend at a time when budgets are strained and home repossessions are rising.
Under new plans revealed yesterday, Reeves, along with the Bank of England and financial watchdogs, cleared the path for more homeowners to borrow six times their income, instead of the typical four and a half times.
A couple on average salaries will be able to borrow £112,290 more than they can at present. The shake-up follows a government-backed move to increase 5 per cent deposit mortgages and banks easing mortgage stress tests. More lenders are also introducing measures that let family or friends give a helping hand.
‘We’re not making homes more affordable, we’re just making debt more accessible,’ warned Ravesh Patel of mortgage broker Reside Mortgages. ‘That’s a dangerous road to go down, especially when interest rates are still high.’
Borrowing boost: New plans clear the path for more homeowners to borrow six times their income, instead of the typical four and a half times
Why are people so worried?
A larger loan will increase monthly mortgage payments and this could lead to more people struggling to afford their mortgages – and ultimately a rise in homes being repossessed by banks and building societies.
Latest official figures show mortgage repossession claims rose by 31 per cent year-on-year in the first three months of the year – even before the latest rule relaxation.
Meanwhile, mortgage arrears grew 8.4 per cent in the final three months of 2024 compared to the same period of 2023 to reach £22.1billion.
The lending restrictions now being unpicked were introduced after the financial crisis, and were credited with helping borrowers avoid getting into financial difficulty when the Covid pandemic lockdowns struck and then when interest rates spiked.
Reeves’ decision to allow greater borrowing follows a succession of moves by banks over the past year to pare back lending rules designed to protect homeowners.
These include easing the mortgage stress test, designed to ensure borrowers can afford to pay their monthly loan even if rates rise significantly.
What is the rule change?
Reeves has allowed banks and building societies to relax a rule imposed in 2014, which says that only 15 per cent of their mortgages can amount to more than 4.5 times the borrowers’ income.
This rule allowed banks to lend more to some borrowers, but kept a lid on riskier lending and limited how many homeowners could stretch their finances.
The change will see more people able to borrow up to six times their salary, opening the door to homes that are tens or even hundreds of thousands of pounds more expensive than their current budget allows.
For example, a couple both earning the average full-time wage of £37,430 would previously have been limited to a loan of £336,870 at 4.5 times salary, but at six times income they could borrow £449,160.
A higher-earning family with a combined income of £100,000 could see their borrowing raised from £450,000 to £600,000.
This would of course lead to more expensive monthly mortgage payments.
Rates are around 4.5 per cent for the typical first-time buyer. On a 30-year mortgage, a couple with average earnings who borrow £336,870 at 4.5 times income would pay £1,707 per month, while at six times income or £449,160 they would repay £2,276 per month.
Borrowers with small deposits tend to pay higher rates and so would pay considerably more interest.
The Bank of England had already cleared the way for Reeves’ announcement, saying in a report last month that this relaxing of rules should be allowed.
However, it warned that across the whole lending market super-sized mortgages should remain within the 15 per cent limit.
The Prudential Regulation Authority and Financial Conduct Authority are reviewing the plans but lenders can drop the 15 per cent threshold immediately.
Weren’t the rules for a reason?
The limit on large mortgages was put in place in 2014 as one of a series of measures intended to prevent another financial crisis by ensuring that borrowers are not overextended.
From the late 1990s until 2007, the housing market was booming and mortgages were easily accessible – even to those with no deposit or poor credit.
Interest-only mortgages were common, and borrowers could ‘self-certify’ income, promising the bank they could afford to repay without proper…
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