Before the election last year, Rachel Reeves made great efforts to woo bankers, entrepreneurs and investors with pledges of fiscal prudence and sensible stewardship as a pro-enterprise Labour Chancellor.
While her first Budget went some way to wrecking that relationship, loading taxes on employers, kowtowing to unions and scaring off thousands of wealthy taxpayers, recent ostensibly City-friendly announcements, including a relaxation of lending rules, may well have gone some way to making amends.
This week Reeves has launched a series of reforms that will impact the mortgage market, including a permanent Mortgage Guarantee Scheme to help more people get on to the housing ladder.
The proposals were announced on Tuesday, 15th July, in front of an audience of bankers and City officials, including Bank of England Governor Andrew Bailey. This came just days after Threadneedle Street announced it would relax lending rules for first-time buyers (FTBs) by changing a cap on the amount people can borrow.
The Bank said this would allow 36,000 more mortgages to be issued at high loan-to-income (LTI) levels per year. While the Bank of England reviews capital rules, the senior managers regime that has for a decade forced senior executives to take personal responsibility for wrongdoing, will also be made less onerous.
The Chancellor’s stated aim is to boost growth. I’m not so sure if this can deliver, given the looming spectre of stagflation. But her reforms should make credit more accessible to a broader range of consumers. The Mortgage Guarantee Scheme may well encourage lenders to offer mortgages to higher-risk borrowers. And the FCA’s proposals to relax affordability rules, such as using rent as proof of affordability, may also lead to an increase in mortgage approvals and personal loans – especially among younger or underserved demographics.
Regulatory easing and fintech-friendly policies could reshape the lending landscape to a degree. SMR reform and ring-fencing review may well reduce compliance costs. It could lead to increased competition from digital lenders and fintech’s. Consumers might benefit from lower rates, faster approvals, and more innovative lending products. Nationwide has already made some changes to increase borrowing to 6 times income.
The reforms could also lead to a shift in product design. Lenders are likely to innovate in response to Government initiatives. We could see hybrid products combining mortgages with investment accounts.
We might see more green loans that are aligned with UK-specific environmental, social and governance (ESG) frameworks. And flexible repayment options for gig economy workers may become more common. All in all, more tailored lending solutions for diverse consumer needs.
While the plans promise to bolster homeownership and innovation, regulators have argued they are in direct contrast with a pledge by banks to help borrowers meet monthly mortgage payments. These reforms are not without their risks.
Let’s not forget why the regulations that Reeves is so keen to roll back were developed in the first place; they were introduced in the aftermath of the 2008 financial crash. The Chancellor will be paving the way for a new era of riskier lending – hence watchdogs’ fears it could end in more people losing their homes. She’s unleashing the biggest mortgage shake-up in a decade.
Yes, it could boost homeownership and cut red tape. But she is pressing ahead with the changes despite the head of the City watchdog warning just months ago that the push could “go wrong” by resulting in a surge of repossessions. In a select committee meeting in January, Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), said a push to ease restrictions on mortgage lending could see the number of home repossessions double. At the time, Rathi said: “If the numbers went up from 1,000 to 2,000 … would that be an acceptable outcome here in Parliament, or would you say to us: ‘Why on earth have you let it go up by 100 per cent?’”
Reform also runs counter to the mortgage charter, which banks signed up to under the last Government. It is meant to help borrowers while limiting possessions. Let’s not forget that in 2024, when the charter was introduced, almost every major party said, “keep possessions down”. Calls to minimise possessions are not consistent with relaxing lending standards.
So while access to credit might improve, there are associated risks. Looser lending standards may lead to over-indebtedness. And regulatory divergence from EU standards may weaken consumer protections. Smart lenders will balance growth with responsible lending practices.
Melanie Spencer is growth and sales lead at Target Group
