Rachel Reeves is to roll back bureaucratic red tape introduced since the 2008 financial crash to allow people to borrow more for mortgages.
Under the reforms, unveiled by Reeves at a summit with finance executives in Leeds [yesterday], more mortgages will be available at more than 4.5 times a buyer’s income.
Now, some are arguing this is a cause for concern – that this represents a return to risky mortgage lending which contributed to the 2008 global financial crisis.
Then, the over-extension of mortgage loans led to the UK and global finance system seizing up, causing chaos in the markets. That in turn led to the near-failure of some high street lenders.
This lightening of regulations to help economic growth – a key plank of government policy – and put more money in people’s pockets – is a measure by which Labour has said its government should be judged.
APPETITE TO LEND
But is this really Number 11’s brainchild? Arguably, the real architects are the lenders – banks, building societies, and their lobbyists – facing a wave of fierce competition and demand that has sharpened their appetite to lend.
The recommendation that that some banks and building societies should offer more high loan-to-income mortgages, when it came, appears to have originated from the Bank of England, not the Chancellor.
“This is precisely why I see no cause for panic and why that I am not anti these reforms.”
This is precisely why I see no cause for panic and why that I am not anti these reforms.
While some have shown wavering confidence in economic policy the Old Lady of Threadneedle Street recently, the Bank of England is not known for its propensity for cavalier risk-taking.
POST-CRISIS REGULATIONS
Furthermore, I think that post-crisis regulations, while well-meaning, have throttled lending and stifled market dynamism.
They represent an over-correction – an artificial bottleneck – that this reform seeks to ease.
This is not a case of removing checks and balances. This is the removal of a historic market distortion – the bureaucratic equivalent of amputating a redundant vestigial limb.
“Extending higher loan-to-income mortgages is not inherently risky.”
Third, there’s no suggestion banks will lend to people who can’t really afford a mortgage. Extending higher loan-to-income mortgages is not inherently risky if it’s paired with forensic affordability assessments and tailored advice – elements that were absent from the pre-2008 bubble but now standard practice among prudent lenders.
No one is suggesting a return to self-cert and the days of ‘liar’ loans.
Fourth, the Treasury forecasts 36,000 extra first-time buyer mortgages in year one, a modest uptick against the million-plus annual mortgage transactions, offering a lifeline to some but no seismic shift. It’s drop-in-the-ocean stuff.
FIRST-TIME BUYER HELP
On the one hand, there are plenty of mortgage providers helping people with 5% deposits, even a few with innovative 0% deposits already, such as Gable Mortgages.
On the other, in areas where property prices remain significantly out of step with average incomes, such as London and the Southeast, it is unlikely those who now qualify for a mortgage will struggle to find a property within reach.
In high-cost regions like London and the Southeast, where prices dwarf incomes, newly eligible borrowers may still struggle to secure properties, limiting the reforms’ reach.
Either way, this isn’t going to change anything a great deal. It’s all around the margins.
The truth is that the best way to help first-time buyers would be for the Government to solve the housing crisis and build some new homes.
That’s the root cause. For all its fanfare, this reform is a sideshow. Only a surge in housing supply will unlock the market.
