Major mortgage rules shake up could help first time buyers get on property ladder

A MAJOR shake up to mortgage rules could help first time buyers get on the property ladder more easily.

Banks could be encouraged to offer more loans to people with smaller deposits and loosen limits on how much they can borrow.

Rules in place to ensure that homeowners can afford repayments if rates rise could be relaxed.

Meanwhile, affordability checks which lenders use to see how much you can pay off each month could also take into account rental payments.

A major barrier for many buying a first home are the stringent checks that look at income to calculate this.

It often means first-time buyers are offered mortgages that have lower repayments than the rent they have been used to paying, despite being able to afford the higher amount.

The potential shake up comes as part of plans by Chancellor Rachel Reeves to kickstart the economy.

Regulators have been told they need to adopt a “pro-growth” agenda, the The Times reports.

Reeves and Prime Minister Keir Starmer have written to over a dozen regulators encouraging them to come up with five reforms to support the economy in the coming year.

Since stepping into the role, the head of finance for the UK has faced pressure to help improve economic growth which has flatlined.

Fresh figures published by the ONS on Thursday showed that the economy grew, but by just 0.1% in November, less than expected by economists.

Mortgage rules are governed by The Financial Conduct Authority (FCA) and Prudential Regulation Authority.

Looser rules on lending could boost homebuying which is generally good for the economy.

Rules on lending were tightened in the wake of the global financial crisis of 2008.

Any change to rules would likely be some way off and there is no guarantee that they would be bought in, as regulators are looking at possibilities at this stage.

What mortgage rules could change?

One of the ideas reportedly floated is to allow banks to give more loans to buyers with smaller deposits.

Deposits are a cash payment that are paid up front by a person looking to buy a house and they are worth a percentage of the properties value.

Most first time buyers pay a 20% deposit on their first home. In December 2024 the average price of a house was £360,197.

That means wanna-be buyers would need to pay a deposit of £72,000 in order to be accepted for a mortgage.

Regulators are also examining the rules which limit how much first time buyers can borrow.

Currently, mortgage lenders are only allowed to lend 15% of their loan book to people whose property is worth 4.5 times their annual salary.

So for example, if you earn £40,000 per year, you might be able to borrow around £180,000 for a mortgage.

These rules have historically been in place to ensure that people borrowing money for a house can afford interest rate increases on their mortgages.

That’s because the amount you pay on your mortgage can increase if interest rates rise.

If you have a variable or tracker rate mortgages payments change when the base rate changes.

But if you have a fixed-rate mortgages payments don’t change until the fixed-rate period ends.

But regulators are also understood to be altering these tests to look at someone’s track record of making rental payments rather than just their annual salary.

If green-lit, the measures would act as a major boon to first-time buyers who have been struggling to get on the housing ladder.

Figures released by Halifax last week showed the average house price has now risen to £297,166, compared to £287,535 at this time last year.

Meanwhile, stamp duty relief available to first-time buyers since 2022 will end in April 2025.

As a result, a first-time buyer purchasing a property valued at £425,000 will incur a stamp duty charge of £6,250.

Mike Staton, Director at Staton Mortgages  said that lenders’ income multiple caps have “simply not kept up with the times”.

“House price growth surpassed wage growth many moons ago and a review of this is required to keep the flow of first-time buyers coming into the market and onto the ladder. “

WHAT SUPPORT IS OUT THERE FOR FIRST TIME BUYERS?

A number of lenders have launched mortgages which help wanna-be buyers who are struggling to get a deposit.

For example, TSB  launched a new “5&5” concessionary mortgage option for its customers.

Under the lender’s new scheme, landlords would offer their tenants a 5% discount on the property’s market value in exchange for putting down a minimum of 5% deposit.

Concessionary mortgages allow wannabe homeowners to bag a property for less than the market value.

They are usually used by landlords selling a house to their tenants, or someone selling a property to a relative.

A number of lenders offer some variation of this mortgage type including Barclays and Natwest.

Another option is a Lifetime ISA (LISA) was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.

The account is tax-free and anyone aged between 18-39 can open one.

You can save up to £4,000 a year and the government will then add a 25% bonus on top.

If you save the maximum amount between the ages of 18 and 50 you could get as much as £32,000 for free.

You’ll also earn tax-free interest on your savings pot, including the added extra from the government.

If you choose to buy a property it must cost less than £450,000 and you must buy it at least 12 months after you make your first payment into the Lifetime Isa.

There are strict withdrawal rules surrounding a LISA that prospective users should be aware of.

For example, you can only make an authorised withdrawal from your LISA to purchase a house or if you are terminally ill.

Anyone who’s opened a LISA for retirement will also be able to access the cash without penalty when they turn 60.

If you withdraw for any other reason you are slapped with a 25% fine, which is known as an “unauthorised withdrawal” penalty.

You can read all about the scheme by clicking the link here.