Loosening mortgage regulations may stimulate home purchases by first-timers, yet likely elevate property values according to the report.
No-fuss mortgage stress testing adjustments might spur a 24% surge in first-time home buyers within five years, Savills asserts.
This surge could amount to over 80,000 new homeowners entering the market, as these less stringent mortgage rules potentially boost first-time buyer transactions by up to 24%. Yet, it's also predicted that these relaxed rules could cause house prices to climb between 5-7.5% over the same period.
Savills explains that transactions and property prices are intrinsically linked: increased borrowing power driving up house prices may lessen the impact on transactions.
The update in Bank of England guidelines occurs in March, exempting lenders from stress testing borrowers at the standard variable rate plus 1%, provided borrowers secure a fix for less than five years.
The Financial Conduct Authority has been put under pressure to act, given the prevailing low interest rates. In the past, they've expressed concerns that the current market approach to mortgage stress testing might be unnecessarily restricting some affordable mortgages.
Next month, the FCA is set to launch a public debate on mortgage market modifications.
Lucian Cook, head of residential research at Savills, states that these loosened lending rules will have a long-term impact on the housing market, although the balance between house price growth and first-time buyer transactions will be essential.
He further explains that the effects will not materialize immediately, with the impact on house prices and transactions likely unfolding over a period of five years. In the short term, economic uncertainty is expected to tame buyer confidence and appetite to take on greater debt.
However, in the long term, the broadening of the buyer pool may boost housing delivery, potentially helping the government meet its housing targets, although it may not be sufficient to achieve those objectives.
Relaxed lending rules could amplify the number of buyers, but the extent to which house prices will increase relies on the supply of new housing stocks adjusted to satisfy the increased demand.
Savills' evaluation shows that the new stress test rules affect mortgage costs as a percentage of income under the former stress-testing criteria, contrasting the outcomes under less strenuous interest rate scenarios. The analysis assumes that half to three-quarters of the increased borrowing capacity is added to the purchase price, either enabling buyers to acquire larger or better properties or due to house price growth.
Santander was the first major lender to adjust its mortgage stress tests in March, lowering all stress test rates by 0.75%, bringing them down to their lowest level since 2022.
The changes could allow Santander customers to borrow additional sums between £10,000 and £35,000, subject to affordability checks and loan to income limits, depending on their unique circumstances.
HSBC and First Direct implemented modifications to the stress rates used in their mortgage affordability assessments in April.
These changes could enable 20,000 more customers to procure a home loan from HSBC and allow First Direct customers to borrow an average £22,000 more.
Clydesdale Bank and Virgin Money announced a reduction in the stress test rate for their residential mortgages in May where the mortgage is variable or fixed for less than five years.
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The current economic uncertainty is likely to hinder buyer confidence and motivation to take on significant debt in the near term. In the long term, though, the market will feel the indirect impact of a growing pool of buyers.
This development will benefit housing construction but is unlikely to enable the government to meet its housing production targets.
- The loosened mortgage rules, as advocated by Savills, could potentially bring about a surge of over 80,000 first-time homeowners within five years.
- The Financial Conduct Authority is planning to launch a public debate next month on mortgage market modifications, addressing concerns about unnecessarily restricting some affordable mortgages.
- The updates in Bank of England guidelines, exempting lenders from stress testing borrowers at the standard variable rate plus 1%, will affect mortgage costs as a percentage of income, according to Savills' evaluation.
- The changes in mortgage stress tests by major lenders like Santander, HSBC, First Direct, Clydesdale Bank, and Virgin Money could allow customers to borrow additional sums, potentially enabling them to purchase larger or better properties.
