Mortgage reforms excluding first-time buyers

Mortgage reforms introduced after the 2008 banking crisis have ’tilted too far’ in support of financial stability, according to a report commissioned by the Building Societies Association (BSA).

The report is calling for an overhaul of affordability and repayment rules, which have led to a decline in first-time buyer mortgages. The BSA is pushing for a review of the 15% cap on the number of home loans a lender can offer that are worth 4.5 times the borrower’s income. It also proposes the introduction of more flexible mortgage products that allow for part repayment and part interest-only lending.

The BSA suggests that looser rules should be considered, despite the risks they may pose to help prospective first-time buyers get on to the property ladder in the current housing market, without compromising the prospects of future generations of homebuyers.

The report, which has been authored by housing expert Neal Hudson and will be published in April, looks at the compromise between financial stability and growing the number of first-time buyers. The report findings will suggest that since the financial crisis this has tilted too far in favour of financial stability. The inevitable cost of this imbalance has been the exclusion of many would-be homebuyers from the housing market. We now need a long-term strategy to make homes more affordable, more available and more appropriate for those living in them. Some of the changes needed include:

• Reviewing the relative costs and benefits of a stricter regulatory environment versus those of higher homeownership rates to strike the right balance between financial stability and enabling access to home ownership.
• Changing regulation to allow mortgages to be more flexible. This could include allowing more part-repayment, part-interest only lending – with the flexibility to shift between them over the life of the loan.
• Reviewing the 15% cap on lending at 4.5 times income, including whether it should specifically support first-time buyers.

The biggest challenge facing first-time buyers is affordability – both affording the cost of buying a home and the cost of owning a home. The sizeable deposit generally required to get on the property ladder has been a barrier to homeownership for some time. However, the BSA Property Tracker Report shows that the recent interest rate rises have led to affordability of mortgage repayments being cited as the biggest challenge for would-be first-time buyers.

Building societies have a strong track record of providing innovative solutions to support those taking their first step onto the property ladder and are responsible for around one-third of first-time buyer mortgage completions. However, more radical reform is needed to fix our broken housing market.

Paul Broadhead, Head of Mortgage & Housing Policy at the BSA said “A properly functioning housing market is dependent on first-time buyers being able to afford their first home. Whilst building societies are creating bespoke, targeted innovations within the current regulatory framework, new thinking and radical changes are needed.

“Many things can be done to fix the broken housing market. But we need to ensure that changes to regulations and support schemes not only help today’s first-time buyers, but don’t fail future generations.”