Chancellor Rachel Reeves is to announce the biggest mortgage shake-up in a decade as part of financial regulation reforms aimed at boosting growth and supporting more first-time buyers.
In her Mansion House speech, Reeves will make permanent an insurance scheme that encourages lenders to offer potentially riskier, high loan-to-value mortgages, implementing a key pledge in last year’s election campaign.
According to the Bank of England, the reforms would mean up to 36,000 additional mortgages being given to first-time buyers over the first year, with loans of more than 4.5 times a buyer’s income. It follows BoE recommendations that some banks and building societies offer more high loan-to-income mortgages.
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Britain’s biggest building society, Nationwide, announced last week that it is aiming to increase its high loan-to-income lending limit. The changes mean that from Wednesday, eligible first-time buyers with a salary of £30,000 can apply for a mortgage (this is down from £35,000), and joint applicants with a £50,000 combined salary (down from £55,000) will be able to apply.
While Reeves’ plans “promise to bolster homeownership”, regulators warn they are “in direct contrast” with banks’ pledges to help borrowers manage repayments, said The Telegraph. Nikhil Rathi, chief executive of the Financial Conduct Authority, said in January that “things are going to go wrong” if regulation is relaxed, since “not everybody is going to play completely by the rulebook”, risking more repossessions.
Reeves may be wanting to revive the “go-go spirit of the 1980s” with “‘Big Bang’ style deregulation”, but the shake-up “is doomed to fail”, said Matthew Lynn in The Spectator. “The main reason why people can’t afford homes is that we don’t build nearly enough of them, and prices are too high, not that the banks are not allowed to lend potential purchasers enough cash.” Easing lending rules will only “stoke a housing bubble”. And “do we really need another 2008 financial crisis?”
Reeves’ mortgage reforms, and other announcements likely to be included in her speech this evening are a “spin of the financial services roulette wheel”, said The Independent, “largely prompted by the fact that she is running out of options”.
Her reforms feel like a return to the pre-2008 model, the result of which was that “the deregulated financial services industry took several risks too many, and the economy was plunged into crisis, taking whole banks with it”.
We are not quite repeating the mistakes of the 2000s, when people could “literally self-certify their income”. But Reeves is “nodding back in that direction”.
The greater worry for Reeves is that if her “bonfire of red tape does not produce the increase to the nation’s wealth that she needs”, then she may not “have any more dice to throw”. And that could mean the prime minister “ends up looking for someone else to do the job”.
What next?
Ahead of tonight’s Mansion House address, Reeves unveiled other financial reforms during a visit to Leeds. These included cutting “unnecessary costs” tied to senior banker accountability rules and launching a campaign to encourage consumers to invest savings in stocks. The government will also review post-2008 ring-fencing rules that protect consumer deposits from banks’ riskier activities.
Meanwhile, the Financial Ombudsman Service’s independence will be reduced, and the rate of interest and total compensation banks must pay to wronged customers will fall.
