Loosening Lending: a familiar tale?
- unlatchedlaw
- Jun 2
- 3 min read
Absolutely brilliant. When times are tough, lenders are seeking shelter in the same business models which devastated the global economy in 2008.
April Mortgages and Gable Mortgages have made headlines recently after announcing 100% mortgages recently. Doing away with the need for a deposit, the hope is that lenders will be more willing to make advances to borrowers in a difficult housing market where real income has failed to follow increasing house prices. The solution, according these lenders, is to offer no deposit mortgages to persons with a salary in excess of £24,000 a year. This deal comes with higher borrowing costs alongside a higher risk of default. It is allowing those who struggle to appropriately save for a deposit (due to poor economic conditions, rising costs of living, and other factors) a chance at ownership. But what does the law have to say about this?
The Financial Conduct Authority recently wrote to the Prime Minister outlining its plan to review mortgage regulation with a view to supporting home ownership and the UK economy. In this letter the FCA took the opportunity to remind firms of the ‘flexibility’ in its Mortgage Conduct of Business rules (MCOB), which are published online. Specifically, MCOB 11.6.18 requires lenders to take into account the impact of likely future interest rate increases on affordability for a minimum of 5 years from the start date of the contract. The FCA has, however, expressed concern at the fact that lenders often add margins to their reversion rate to stress test a borrower’s affordability in the potential event that interest rates rise. Apparently, the outcome of this exercise is “unnecessarily restricting access to otherwise affordable mortgages.”
There is truth to this in the sense that lenders are being overly protective by making an affordable mortgage inaccessible, but the reality is that this reflects a necessary control on mortgage activity which (as 2008 demonstrated) can spiral to the detriment of consumers. An appropriate solution, instead of no deposit mortgages, more likely lies in two of the matters which the FCA will focus on in the upcoming review of the regulation – remortgaging with a new lender and alternative affordability testing. The law ought to dissuade financial products which loosen standards in the name of flexibility.
Whilst it is unlikely that major lenders will be rolling out the 100% mortgage brigade anytime soon, the wider impact on the average borrower must be considered if such loans are popularised. For one, the risk of negative equity (where the outstanding loan exceeds the value of the property as house prices fall) is greater under such a model. There is already a significant over-indebtedness crisis amongst low income households, and houses continue to be over ten times the median earnings of households in the UK. Reviewing planning law and reducing the gap between owners and renters are the types of fundamental changes that must be considered if housing affordability is to change. Changes to lending which increase risk for people who are already struggling to save for the ‘contingencies of life’ is a short term bandaid, not a long-term solution.
Reducing bureaucracy and conduct requirements in asset management, money laundering processes, and other important financial services areas is critical to allow for proper development of the UK economy. At the same time support for vulnerable consumers and making financial opportunities more accessible through digital innovation is great, but what does this actually mean in substance for home ownership in the UK? That ought to be the focus of regulators for the future of mortgage lending. Until that question is comprehensively tackled, borrowers should approach these new financial products with the utmost caution.
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