Mortgage lenders weigh in on the UK housing problems

UK Finance’s latest report "Homes We Need: An Assessment of the UK Housing Market" provides a comprehensive overview of the challenges facing the UK housing market, particularly concerning mortgages and mortgage lending.

The report was released at the end of last week, and was commissioned by the 300 strong association that boasts many household names from the mortgage industry. It follows a report earlier in the month that shows that mortgage lending is still well below what it calls ‘normal levels’.

With affordability at an all-time low, first-time buyers and other home seekers are struggling to access the housing market. The report sheds light on these critical issues and offers a set of recommendations aimed at improving mortgage accessibility, easing the financial burden on homebuyers, and fostering a more sustainable mortgage lending environment.

Findings: Affordability Challenges and Mortgage Lending Constraints

One of the primary findings of the report is the significant deterioration in housing affordability in the UK. As we are all aware, over recent decades, house prices have risen at a pace far exceeding wage growth, leaving many potential buyers priced out of the market. The deposit required to purchase a home has increased substantially, with median deposits rising from £22,000 to £30,000 over the past seven years. In some regions, particularly London, the cost of homeownership has become unattainable for many young buyers.

The report emphasises that while monthly mortgage payments may be affordable for some, the barrier lies in the large deposits needed to secure these mortgages. This situation is compounded by stricter lending criteria, introduced in response to the 2008 financial crisis, which makes it more difficult for prospective buyers to secure the necessary financing. Policies such as high loan-to-value (LTV) and loan-to-income (LTI) ratios have been implemented to ensure financial stability, but they have inadvertently restricted access to mortgages, especially for first-time buyers who do not have significant savings.

The report also highlights the widening gap between high and low LTV mortgages. Borrowers with smaller deposits are often subject to higher interest rates, further exacerbating affordability challenges. The overall result is a mortgage market that continues to marginalise those with lower income or savings, leaving many unable to step onto the property ladder.

The report, thankfully for our home-buying clients, has a number of recommendations;

Key Recommendations: Improving Mortgage Access

To address these challenges, the report offers several recommendations focused on easing mortgage lending constraints and helping first-time buyers access homeownership.

1. Reviewing Mortgage Affordability Regulations: The report calls for a comprehensive review of mortgage affordability regulations, including the current cap on high LTI mortgages. These regulations, designed to promote financial stability, may be inadvertently preventing those with otherwise stable incomes from entering the housing market. A more flexible approach could allow for greater access to mortgages without compromising overall financial security.
2. Increased Access to Shared Ownership Schemes: Shared ownership schemes, where buyers purchase a portion of a property and pay rent on the remaining share, have proven to be a successful pathway to homeownership for those struggling with deposits. The report recommends improving access to these schemes, both through increased availability and better regulation to ensure fair treatment of participants. By expanding shared ownership, more buyers could afford their first home, even if they cannot afford a traditional mortgage.
3. Maintaining Increased Stamp Duty Bands for First-Time Buyers: In recent years, stamp duty bands were temporarily increased for first-time buyers, lowering the upfront costs associated with buying a home. The report advocates maintaining these elevated thresholds permanently, which would continue to ease the financial burden on first-time buyers and make homeownership more accessible.
4. Supporting Innovation in the Mortgage Market: The report suggests that regulators should support innovation within the mortgage market to create more tailored products for different types of buyers. This could include more flexible lending criteria for certain groups, such as first-time buyers or those purchasing homes in high-demand areas. In particular, the report endorses exploring new financing models that reduce upfront costs for buyers, such as equity-sharing mortgages and long-term fixed-rate products.
5. Extending Mortgage Guarantee Schemes: The report highlights the potential benefits of extending government-backed mortgage guarantee schemes, which help lenders offer higher LTV mortgages to buyers with smaller deposits. These schemes provide lenders with security, encouraging them to lend to a wider range of customers. Expanding and rebranding such initiatives, as the government has suggested with its proposed "Freedom to Buy" scheme, would help more buyers access the housing market without needing a large deposit.

Addressing Long-Term Challenges in Mortgage Lending

While these recommendations offer short-term solutions to the housing affordability crisis, the report stresses that long-term reforms are essential to create a more sustainable housing market. The association says that increasing the overall supply of homes, improving the efficiency of the planning system, and ensuring that mortgage regulations keep pace with the changing market are all critical to fostering a healthier mortgage lending environment.

The report also emphasises the need for cross-party support for housing reforms, ensuring that policies remain consistent beyond electoral cycles. With a more stable policy framework, lenders and buyers alike could make decisions with greater confidence, leading to a more vibrant and accessible housing market.