While the goal of boosting home ownership and economic growth is commendable, the key question remains: is loosening restrictions on high loan-to-income mortgages truly the right solution?
The Financial Conduct Authority’s (FCA) proposals to ease mortgage regulations have sparked significant debate. Currently, lenders are limited to ensuring no more than 15% of their mortgage book comprises loans above 4.5 times the borrower’s income. This cap, introduced after the 2008 financial crisis, was designed to prevent the kind of over-leveraging that left both households and financial institutions dangerously exposed. However, under the new plans, this restriction could be relaxed, allowing banks to offer more high loan-to-income mortgages.
Proponents argue that relaxing this rule could help more people, particularly first-time buyers, get onto the property ladder. By enabling borrowers to secure higher loans, particularly in high-cost areas like London, this change could unlock demand and stimulate activity in the housing market. Such a shift could also trigger broader economic benefits, as increased home purchases often lead to higher spending on furniture, appliances, and home improvements, boosting GDP and supporting struggling retail and supply chain sectors.
However, this approach poses significant risks to financial institutions. By increasing exposure to high loan-to-income mortgages, banks could find themselves more vulnerable to defaults if economic conditions worsen. Rising interest rates or a downturn in employment could push overstretched borrowers into financial distress, increasing the likelihood of loan defaults. A wave of such defaults could threaten the stability of lenders, potentially undermining confidence in the wider financial system and echoing the systemic failures of 2008. In prioritising short-term economic gains, the long-term resilience of the banking sector may be jeopardised.
Furthermore, this change risks exacerbating existing problems in the housing market. Allowing more high loan-to-income borrowing could push house prices even higher, worsening affordability for many and widening the gap between those with property wealth and those without. Moreover, enabling buyers to stretch their finances further leaves them more vulnerable to economic shocks, such as rising interest rates or job losses, potentially increasing financial instability.
The root issue is not borrowers’ access to credit but the fundamental imbalance between housing supply and demand. Expanding the housing stock, especially affordable homes, would address this disparity more sustainably. Additionally, investing in regional infrastructure and economic development could reduce pressure on high-demand areas, offering better alternatives than simply allowing borrowers to take on greater debt.
Countries like Germany and Switzerland provide valuable lessons on balancing housing markets. Both nations have thriving rental markets with strong tenant protections and affordable, long-term leases. By investing in rental housing as a viable alternative to ownership, the UK could ease the cultural and financial pressures that currently fuel excessive demand for home purchases. Expanding rental housing stock, supported by tax incentives for landlords providing long-term, stable rentals, could help meet housing needs without encouraging unsustainable borrowing.
While the FCA’s proposals may deliver a short-term boost to the economy, they risk exacerbating long-term issues in the housing market and financial system. Policymakers must resist the lure of quick fixes. Instead, a collaborative effort to address housing supply, affordability, and financial stability will be essential to create a fair and resilient market for future generations.