Government urges relaxation of mortgage lending rules
In a bid to kick-start growth in the economy, financial regulators have proposed allowing banks to lend more mortgages to first-time buyers with smaller deposits and lower incomes.
Reports are emerging that suggests that UK financial regulators are considering proposals to enable banks to offer more mortgages to first-time buyers with smaller deposits and lower incomes.
The initiative aims to stimulate economic growth, aligning with government calls for regulators to take on greater risks to encourage spending.
This move could potentially lead to a relaxation of restrictions on riskier mortgage lending, which were introduced following the 2008 financial crisis, when several banks required taxpayer-funded bailouts.
In a letter sent to Prime Minister Sir Keir Starmer late last week, Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), outlined plans for bold changes. He reiterated this commitment during a roundtable discussion with Chancellor Rachel Reeves.
Rathi's letter highlighted the FCA’s intentions to “remove unnecessary regulation” with planned initiatives for 2025, including:
- Streamlining FCA rules based on industry feedback to remove or simplify regulations, alongside creating a machine-readable version for improved accessibility.
- Reducing reporting burdens on firms in collaboration with the Bank of England and PRA.
- Eliminating the Consumer Duty Board Champion role, now that the Duty is in effect.
- Ensuring future consumer protection consultations explore whether the Consumer Duty is sufficient instead of introducing new rules.
- Simplifying responsible lending and advice rules for mortgages to support home ownership, while opening discussions about balancing access to lending with default risks.
- Consulting on the removal of outdated guidance, such as those concerning maturing interest-only mortgages.
- Collaborating with the government to remove overlapping standards, such as the Mortgage Charter.
Nikhil Rathi also suggested that, with government backing, the FCA could reduce costs associated with anti-money laundering measures, including easing "know your customer" requirements for small transactions. Separately, the Treasury began modernising the Consumer Credit Act in 2022.
The government has tasked the FCA and other UK regulators with proposing rule changes to encourage more risk-taking and investment, as part of Prime Minister Starmer’s strategy to drive economic growth.
Currently, UK mortgage lending is tightly regulated by the FCA and Bank of England, with rules limiting banks to having no more than 15% of their mortgage portfolios in loans exceeding 4.5 times a borrower’s income.
Matt Smith, mortgage expert at Rightmove, expressed optimism about the potential changes, saying "It’s encouraging that regulators are now exploring what a review of mortgage affordability might involve. Regulatory reform is crucial to improving affordability for home-movers, especially first-time buyers. While lenders have introduced innovative products and schemes to assist buyers, significant support from both the government and regulators is needed to expand options for homeownership."
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