First-time buyers are one cohort to be affected by lower home loans and reduced borrowing criteria – as they could find themselves in negative equity in future
Cheaper mortgages and relaxed borrowing rules could lead to a temporary spike in house prices that risk future financial hardship for buyers, experts have warned.
Several lenders, including the majority of the ‘big six’ high street banks, have lowered mortgage rates in recent weeks, while several providers have relaxed their borrowing rules, so buyers can borrow more cash.
The likes of HSBC and Halifax have reduced their stress rates, which are used to calculate if a household could afford repayments if mortgage costs were to rise.
For example, Halifax has offered improved borrowing on five-year fixed mortgage products, boosting the potential by up to £38,000. Those looking for such a deal will see a stress test of 4.5 per cent, when it was previously five per cent, meaning they have to prove they can afford this interest rate in future.
But mortgage brokers, housing experts and academics say that cheaper borrowing, and more access to credit could see house prices rise, as people can afford to take out bigger loans.
This can cause problems further down the line if mortgage rates were to rise or house prices dropped again. Households could find themselves struggling to afford repayments, or to remortgage or sell if their home value dropped below the amount borrowed.
Owing more on your loan than the current value of your property is known as negative equity.
The warnings come as insiders say that Chancellor Rachel Reeves is close to signing off new proposals that would relax mortgage rules that limit the amount banks can lend to those with tiny deposits.
These regulations were introduced after the 2008 financial crisis and currently limit how many low deposit mortgages a lender can have on its books.
Lewis Shaw, a mortgage broker at Shaw Financial Services told The i Paper: “A perfect storm is brewing in the housing market.
“Lenders are loosening their stress tests, compounding increased affordability with higher income multiples through first-time buyer schemes, longer terms, and with interest rates sliding, mortgage payments seem doable compared to rents.”
He said this could send house prices “skywards”.
Mr Shaw added: “The problem is, first-time buyers are now backed into a corner. If they buy, they risk falling into negative equity if something triggers a house price correction. But if they wait and prices keep rising, they might never get on the ladder at all. Either way, it could be a lose-lose.”
Broker Andrew Montlake, of Coreco, said that easier borrowing conditions for first-time buyers could cause house prices to rise in areas “where there isn’t enough supply”.
Labour has pledged to build 1.5 million new homes over the next five years but, in some parts of the country, particularly rural areas like Cornwall, there is a shortage of affordable new housing for first-time buyers.
Building new homes is a “long-term” solution, Montlake said. “But, in the short-term, anything that stimulates demand could push house prices up,” he said.
The last time a British government intervened in the housing market with Help to Buy – a government-backed low-deposit scheme – research suggests it inflated house prices for first-time buyers.
Dr Matthew Sparkes, an assistant professor in sociology at the University of Cambridge, warned that the risk of defaulting – not being able to repay a mortgage – is higher for buyers who take out a large mortgage with a small deposit.
“These buyers are opened up to market fluctuations such as interest rate rises or house price falls,” Dr Sparkes, who has studied mortgage credit since the 2008 financial crisis, said.
If something goes wrong, as it did in 2008, Dr Sparkes said first-time buyers could be “blamed” for borrowing in a risky way while the “financial system is protected”.
“Reeves suggests that [mortgage] regulations have gone too far but the pressures faced by the financial sector are because there is an increasing disconnect between people’s salaries and the price of houses,” Dr Sparkes said.
Mortgage rates have fallen slightly because economic volatility in the US caused by President Trump’s trade war has increased the number of interest rate cuts the Bank of England is expected to make this year – possibly as many as four, according to traders.
But the number of expected cuts has also increased because the Bank of England now expects economic growth to be very sluggish, so though mortgage rates will be lower in the short-term, the risk of job losses and slower pay growth is higher.
Expert housing market analyst Neal Hudson said: “We’re walking a fine line between a short-term boom provided by falling interest rates and the potential negative consequences of people losing their jobs and the economy weakening because of what the US President is doing.”
He cautioned that these changes to lending were more about increasing the turnover of lenders than helping first-time buyers access affordable and sustainable mortgages.
If the UK’s economy subsequently took a downward turn, first-time buyers who borrowed large amounts with small deposits could find themselves in negative equity which means you cannot sell your home without paying the lender the shortfall.
Added to that, if interest rates rise sharply again in the future, households could struggle because they would have to pay more for their borrowing.
Some experts, however, are doubtful that house prices will rise significantly.
Richard Donnell, executive director at Houseful, said that that post-2008 regulations have made it harder for first-time buyers and other movers to access credit without large deposits.
But he added: “The recent clarifications from financial regulators, which have seen some lenders relax their stress tests, will help some people who are almost able to buy a home, but it’s not going to open the floodgates to huge numbers of first-time buyers.
“A greater relaxation of the rules, however, could impact house prices, mainly in regional markets outside the south of England. So this is a delicate balance of supply and demand.”
HM Treasury and the Bank of England were contacted for comment.
Buyer beware – relaxed lending rules pose risk for first-time buyers
By Vicky Spratt, Housing Correspondent
House prices in Britain remain at near historic highs – rising higher and faster than earnings almost consistently since the 90s.
Average house prices are currently roughly 8.8 times average earnings in this country.
This is a problem because most people (apart from the super wealthy, or those with wealthy parents) will buy a home with a relatively small downpayment (or deposit) and take out a mortgage based on their income to cover the rest.
As house prices have risen beyond earnings, this ratio has broken which means low deposit or longer-term mortgages have become more and more common.
In one sense, Reeves is right to look at relaxing rules so that people without large amounts of cash can still access home ownership.
However, encouraging people to borrow large sums of money at a time when the global economy is volatile is not entirely responsible.
In 2022, the Bank of England relaxed stress tests to promote borrowing and so far, this hasn’t had a disastrous impact. But that’s not to say it couldn’t in the future.
House prices could fall again, interest rates could spike again whilst recession is always a possibility.
Everything could, equally, be fine. Perhaps we’ll return to a period of relative global stability combined with ultra-low interest rates.
The latter is unlikely for now. So, both Reeves and lenders trying to boost their balance sheets must not see growth as a trade-off for stability. Because, as we know from 2008, it’s homeowners who pay the price of regulators’ mistakes.
