The Bank of England has rolled out looser mortgage rules that policymakers hope will help 36,000 more first-time buyers on to the housing ladder each year.
New guidelines announced by the UK’s central bank mean that individual banks and building societies can offer more high loan-to-income (LTI) mortgages, which are equal to, or worth more than, 4.5 times a borrowers’ annual earnings.
While high LTI loans are usually considered more risky, the Bank said most banks were not taking advantage of their individual caps, meaning there were fewer of those loans available to borrowers than hoped.
Sam Woods, the chief executive of the Bank’s regulatory arm, the Prudential Regulation Authority, said the changes should benefit tens of thousands of first-time buyers.
“It’s more than a tweak,” Woods said on Wednesday. “If you look at the unused capacity that’s there at the moment, we think that’s equivalent to another 36,000 high-LTI, first-time buyer mortgages per year in the UK.”
Banks and building societies can now apply to increase their share of high LTI mortgages on their books, as long as such loans do not account for more than 15% of new lending across the UK each year. The last measure showed high LTI lending hovering at about 9.7%, with the rule change expected to push that figure to 11% by the end of 2025.
Woods said it proved changes could be made without affecting the Bank’s overall risk tolerance. It comes as the Labour government pressures regulators to take more risks to spur UK growth.
The Bank highlighted other factors constraining first-time buyers’ ability to buy a house, including requirements for large deposits. Just under 80% of potential first-time buyers do not have enough savings to cover a 5% deposit for the typical home in their area, it said.
It also emerged on Wednesday that the chancellor, Rachel Reeves, is planning to launch a promised government-backed guarantee for mortgages at next week’s Mansion House speech.
In what is due to be called “Freedom to Buy”, the Treasury will agree to cover banks’ losses on 95% mortgages if borrowers end up defaulting and having their homes repossessed. The scheme, which was floated in Labour’s manifesto, is meant to encourage banks to offer riskier, larger-value loans.
The programme, reported by the Financial Times, is one of a series of announcements expected during the chancellor’s speech next Tuesday, alongside potential changes to cash Isa caps and pension rules.
However, the Bank of England governor, Andrew Bailey, joined a growing number of industry bosses opposed to the suggestion that pension funds could be forced to buy UK assets. Earlier this year, Reeves said she would create a “backstop” power to force large pension funds to back British assets, if necessary, to drive up investment.
“I do not support mandating. I don’t think that’s appropriate,” Bailey said on Wednesday.
The governor and Woods were speaking after the Bank’s released its financial stability report, which warned that the looming threat of much higher tariffs amid Donald Trump’s trade war could lead to a fresh wave of companies going busts.
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“The potential for much higher trade tariffs increases the likelihood of corporate default in the most exposed sectors, and losses for their lenders,” the report said.
The Bank said UK businesses as a whole appeared largely resilient amid the uncertainty, given relatively stable net debt levels, and that most British companies were able to withstand sharply higher tariffs even if their earnings fell by 10% and their borrowing costs surged.
However, it said that the overall picture could “mask vulnerabilities within particular firms and sectors”, including manufacturing and retail.
“Notwithstanding the trade deal between the UK and US, if the shock were to worsen, with greater than expected tariffs globally and larger than expected spillovers to world demand, it could impact UK corporates,” the committee said, including through weaker global demand, higher supply costs and fewer borrowing options, with banks and other lenders less willing to provide loans.
It added that further shocks could affect the UK manufacturers that rely on exports to the US, and retailers that depend on strong consumer demand and would struggle to offset losses by raising prices.
The Bank said its survey suggests that companies more vulnerable to a global trade shock, either directly or indirectly, account for about 60% of UK employment.
