Photograph: Chris Ratcliffe/Bloomberg/Getty Images
Mortgage reforms introduced after the 2008 banking crisis have “tilted too far” in support of financial stability to the point that first-time buyers are being excluded from the housing market, building societies have warned.
A report commissioned by the Building Societies Association has called for an overhaul of affordability and repayment rules, which they say have contributed to a steady decline in first-time buyer mortgages since the mid-2000s.
The BSA, whose 42 members serve 26 million customers across the UK and hold more than £500bn in assets, says it should involve reviewing the 15% cap on the amount of home loans a lender can offer that are worth 4.5 times the borrower’s income.
It is also pushing for the introduction of more flexible mortgage products that allow for part repayment, part interest-only lending that could change over the term of the loan.
The latter proposal echoes policies that pre-date the 2007-08 financial crisis, when it was common for households to have interest-only mortgages that could nearly halve their monthly repayments. Those mortgages allowed borrowers to take out large loans that they never had the prospect of repaying, but faced a major crackdown by regulators in the wake of the banking crash.
The BSA says those regulations should now be reviewed. “An important balance, that has been a key feature of the mortgage market since the financial crisis, is the compromise between financial stability and first-time buyer numbers,” it said.
“The last decade has seen the balance tilted in favour of financial stability and that has had an inevitable cost, with many excluded from home ownership – particularly those with single incomes, lower than average incomes, or unstable incomes and with less wealth.”
The association said it was aware that looser rules had previously led lenders to take greater risks, including in the 1980s and early 2000s, which had “ended poorly”. “There is no correct answer for the appropriate balance, but it needs honest debate about the costs and benefits,” the BSA said.
Chris Sykes, the technical director of the mortgage broker Private Finance, cautioned that more flexible products could complicate affordability tests for lenders, but were not out of the realm of possibility.
“Flexibility in mortgages is important for first-time buyers,” he said. “I would be in support for some low-start mortgage options to come back, where either a rate is more back-end loaded on a product, or a product allows for an initial period with a higher percentage on interest-only that bands down over time. How a lender would demonstrate affordability on such a product would be difficult, and would be where the regulators could work with them to help.”
