Why we should approach changes to mortgage lending rules with caution
The announcement last week by the UK Government that strict rules on mortgage lending could be relaxed to allow more people to borrow for a home has been met with a cautious welcome. As part of a series of relaxing borrowing conditions it is hoped that actions such as this – and the easing of other financial regulations – will lead to economic growth.
The key element to remember here is this may be a positive move as long as it is being done as part of long-term reform rather than short-term political gain. If this is only being considered because a quick fix is currently required to boost economic growth, then it must be a non-starter.
Prior to contemplating any relaxation of lending criteria, it is essential to remember why the current financial restraints were put in place. A long time has passed since house prices suddenly collapsed and memories can be short when it is inconvenient, but the scale of the 2008 decline is difficult to understate.
Average house prices in Scotland peaked at £145,641 in May 2008 and this price was not exceeded for over nine years until July 2017. In some parts of the UK, it took over a decade for prices to recover so the scale of this collapse was huge and the impact on individuals who faced negative equity for years or even the loss of their homes was enormous.
Any change which even remotely brings the possibility of a repeat of this situation is something that should never be considered. That isn’t to say that some restructuring of the current lending criteria isn’t required but it is the scale and level of change that must be closely considered and monitored if it is to be introduced.
Lenders, obviously, are keen. They want to turn the lending taps on and let mortgages flow more freely. For homebuyers who may be struggling to get the mortgage they want, then relaxing lending will be welcome but that is not a reason to change the affordability rules.
The Financial Conduct Authority (FCA) rightly points out that the current number of borrowers missing repayments, or having homes repossessed, is evidence that we may have gone too far in restricting lending. However, they also need to consider the balance between their primary objective of protecting consumers, and the secondary objective of promoting growth.
It is essential in changing these regulations that there is appropriate measure of the risk for individuals. Prior to 2008 many buyers grossly overestimated their ability to afford the loan they wanted compared to the one they could pay. Loans of 125 per cent of the value of a property were available which now seems ridiculous but free lending led to higher house prices, resulting in the need for greater loans. Thus, a spiral of debt was created that was unsustainable, and nobody benefits from house price booms because they invariably end in a crash.
What we need is a balanced approach which encourages homebuying without putting people at financial risk if interest rates rise. Almost two decades of low interest rates have made people complacent about affordability but there needs to continue to be appropriate stress testing of loans to allow for any rise in interest rates if more relaxed lending is to be safe.
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