The UK’s FCA has revealed first signs of embracing of the government’s growth agenda by announcing proposals that could potentially change and relax mortgage rules in the UK.

The new proposals were referred to in a letter by FCA chief Nikhil Rathi written in response to the government’s repeated calls to help growth by reducing what it sees as needless regulatory burden.

The letter included a number of proposals as well as recommendations by the FCA. On the subject of mortgage rules, the regulator said it will:

• begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults;
• consult on removing maturing interest-only mortgage and other outdated guidance;
• work with the Government to remove overlapping standards, for example the Mortgage Charter, which requires lenders to help customers who might be struggling to make mortgage payments due to increased interest rates.

Mortgage applications in the UK are screened against a number of borrowing rules, put in place by the FCA, to make sure that both the borrower as well as the lender act in a responsible way. The logic behind the rules is to make sure that applicant’s have the financial ability and the means to repay the amount that they are borrowing in a timely manner.

Mortgage rules in the UK were toughened in the aftermath of the 2008 financial crisis, requiring lenders to carry out stress tests, affordability assessment, assessment of creditworthiness and other measures.

Potential impact

The thinking behind the proposed changes to mortgage rules is that they will enable more people to buy a house, especially those buying for the first time.

Last year, the average number of mortgage applications that were approved in the UK was around 60,000 per month, according to figures by the Bank of England. By comparison, that number was around 72,000 in 2022.

As for first-time buyers, figures by property website Rightmove suggest that those purchasing their first property in 2024 would on average pay £350 more towards monthly repayments than they would do five years ago.

Mortgage affordability

According to Matt Smith, a mortgage expert at Rightmove: “It is really encouraging that the market regulators are now considering what a review of mortgage affordability could look like. Regulatory change is what we’ve been calling for, as that is what is needed to truly impact home mover affordability, particularly for first-time buyers.”

The FCA has now said it wants to support home ownership as part of the government’s broader agenda on growth. But the letter also mentions “responsible lending,” a clear signal that lenders will not be given a free rein.

However, some experts argue that it’s the government and the regulators, not the lenders, that are stopping people from getting a mortgage.

Charles Roe, director of mortgages at UK Finance, says: “Banks will always lend responsibly but the current rules are restricting the number of people who can get a mortgage and so could be relaxed.”