Opening doors: How UK mortgage rules are shifting for first time buyers
After years of strict lending, new approaches from regulators and lenders are creating fresh opportunities
Millions of aspiring homeowners in the UK have had their dreams deferred, caught in a cycle of soaring house prices and rigid mortgage rules. But a pivotal shift is underway, offering a glimmer of hope for a new generation of first-time buyers.
How to help more first time buyers is top of the agenda for mortgage lenders, Government and regulators. Until the Government significantly boosts the construction of new homes, increased mortgage lending to first time buyers presents the primary short-term solution. More mortgage lending can also make clear to house builders that realisable demand will be there for homes they build.
The UK’s first-time buyers have for too long been caught between a rock and a hard place: soaring house prices and strict mortgage regulations. Recent developments, however, signal a shift—one that could open doors for a new generation of homeowners.
Echoes of a crisis: How 2008 shapes 2025
The legacy of the 2008 financial crisis still looms long over the mortgage market. Collateralised Debt Obligations, 125% loan to value mortgages and self certification of income still shape the debate 17 years later. The housing crash of the early 1990s and the huge level of repossessions was also at the forefront of decision makers minds as they responded to the events of 2008.
Responding to a major financial crisis is going to lead to a strong immediate response and strict regulation. Clear evidence of market failure should be dealt with.
The problem is that over time what seems like a measured response to a crisis can lead to too many regulatory barriers. Well intentioned protection often becomes a barrier to access.
It's estimated that around 2 million potential first time buyers have missed out on home ownership as a result of post-2008 and mortgage changes. That's 2 million people that have had their dreams delayed, put off having children or just not felt confident to build the type of life they want.
The response to the 2008 financial criss would have felt reasonable at the time. A massive global financial crisis caused by, let's be honest, dodgy mortgage lending and financial trickery should be cracked down on by more regulation. The one criticism that seemingly could be levelled is that it was bolting the stable door after the horse had bolted.
The problem with regulation is that once it's in place it becomes very difficult to reverse. Our over cautious system seems to work on the view that once regulation is in place it needs to stay forever. Even more so when linked to previous problems. It's too easy to stoke outrage over relaxing mortgage regulations but pointing to the 125% mortgages and self certification and saying that if we take those rules away that will automatically happen again.
The reality is that we have moved on from the early 2000s. New lending practices, stronger consumer voices and changes in approach in such as the consumer duty as well as changes in practice from banks and building societies mean mortgages are being offered in a very different environment.
It’s looking like another period of crisis may have been what was needed to start considering changes to regulation. The multiple crisis points starting with the pandemic and moving through rapid interest rate rises, the Russian invasion of Ukraine and cost of living challenges have put the need to drive economic growth at the centre of what the Government needs to do.
Mortgage lending has been one area that has quickly been highlighted as an area where relaxing regulation could help spur growth. The mortgage market, particularly for first time buyers does seem to be shifting both in terms of regulation, product offers and the willingness of mortgage lenders to now challenge some of the post-2008 assumptions.
Regulatory change: The time is now
Fast forward to 2025, and the mood is shifting. The Government is proactively pushing regulators to be more pro-growth. Is this an Argentinian style chainsaw to regulation or a polite British enquiry that we might, maybe, if not too much trouble possibly think about removing some regulations to help the economy grow.
For now we seem to be more towards the polite and gradual reform end of the scale. The most significant change has been a change in FCA rules around mortgage stress tests. FCA Chief Executive Nikhil Rathi argued that lenders had been “too cautious” in the way they had applied these rules to first time buyer lending.
The FCA reminded lenders that there is flexibility in their rules which means they don’t need to always stress test against revert rates, allowing borrowers to borrow more, potentially up to £30,000. This has been a popular change with most lenders already making changes.
A further FCA consultation has looked at simplifying some of the low hanging fruit rules that could also be changes. This consultation covered rules around:
Remortgaging with a new lender,
Discussing mortgage options outside a regulated advice process.
Reducing a mortgage term.
The FCA will also open a public discussion into the future of the mortgage market in June. This will be a large scale conversation covering the whole mortgage market looking at “risk appetite and responsible risk taking, alternative affordability testing and product innovation, lending into later life and consumer information needs.
The test for this work will be the scope for change the FCA sets out. Will it be tinkering around the edges or a genuine attempt at reducing regulation to lend more.
There is hope for optimism in this quote from FAC Director of Retail Banking Emad Aladhal who ahs said:
“That’s why, with the Consumer Duty now in place to maintain high standards, we want to make it easier, faster and cheaper for borrowers to access and make changes to their mortgage.”
Lender Innovation: Pushing Boundaries Within Existing Rules
In terms of making it easier for first time buyers to access a mortgage removing the deposit requirement would be a game changer for many. The rise of the Bank of Mum and Dad and the increasing requirement for some additional financial support with a mortgage deposit is pushing home ownership out of the reach of many people.
Pre-2008 some of these potential first time buyers would have been able to access a 100% mortgage removing the need for wealthy parents or many years of saving to achieve a deposit. The deposit requirement and a broad approach across the mortgage market of maximum 95% LTVs is acting as a barrier to lending.
Two smaller providers have recently entered the 100% mortgage market bringing attention back to these products. April Mortgages and Gable Mortgages have both launched 100% LTV products, with the high LTV supported by additional borrowing checks and a higher interest rate. While both are smaller players in the market the positive reaction and interest from customers, the media and brokers shows this is seen by most as a positive step for the market.
The building societies have also led the way in maximising lending within the current rules. Nationwide’s Helping Hand mortgage, Yorkshire Building Society’s £5k Deposit Mortgage and Skipton’s Track Record Mortgage have all been designed to help first time buyers with issues around deposits and affordability to provide responsible lending to good quality applicants who might not be served by traditional mortgage products.
These products use the capacity with the Bank of England Financial Policy Committee flow limit to offer higher loan to income lending to first time buyers. The flow limit restricts mortgage lending at more than 4.5 times an applicant’s income to no more than 15% of a lender’s mortgages. Building societies are responsible for 35% of first time buyer lending so these institutions are driving support for this group.
Pushing for regulatory change: How could lending capacity grow
The flow limit and high LTI lending point is also a point of focus for the building societies in their engagement with Government and regulators. Building societies have been calling for an increase in the cap, most recently writing to Treasury Select Committee chair Dame Meg Hillier to promote this as a way of securing more lending.
With house price to income ratios up across the country and around 8:1 in London more of this type of lending could support more people to become first time buyers. This could be particularly useful for those who may be paying more in rent than they would be per month on a mortgage.
This would also be a relatively simple change to implement as high LTI products are already available in the market. An increase in the cap would simply allow any limits they may currently have on those products.
Beyond raising the LTI flow limit changes to regulations which limit access to interest only rules could be change allowing some first time buyers to access part repayment, part interest only lending. This would allow some borrowers to access lower monthly repayments initially before moving to a full repayment mortgage when their circumstances change.
These steps, taken together, would help more first-time buyers access affordable mortgages and achieve homeownership, while maintaining financial stability.
What might this mean for the housing market?
First time buyers mortgage activity will surge over the next five years
Relaxed mortgage stress tests and higher LTV products will significantly boost borrowing power for first-time buyers, leading to an increase in first-time buyer transactions by 2030. This will be driven by both regulatory changes and innovative lending from banks.
100% LTV and high loan to income mortgages will become mainstream, counterbalanced by strict risk controls
Products offering 100% LTV and higher loan to income ratios above 4.5x will become widely available, supported by regulatory relaxation. However, lenders will use affordability assessments, enhanced risk assessments and effective underwriting to manage default risks, making these products accessible yet responsible.
Housebuilders will respond to increased first time buyers mortgage lending by building more homes.
The increase in demand driven by Help to Buy led to house housebuilders responding with increased levels of supply. There were criticisms of the scheme and it's clear it shouldn't be reintroduced but something is needed to help step in and drive demand. Relaxing some mortgage regulation will help do this.
The Road Ahead: Maximising first time buyer lending while more homes are built
The UK mortgage market is at a crossroads. The pendulum is swinging from strict stability focused regulation toward a more flexible, accessible approach. For first time buyers, this could mean more options, easier access to credit and a real shot at homeownership, if they can demonstrate affordability and creditworthiness.
As the Government, FCA and Bank of England continue to consult and adapt, the challenge will be to balance access with financial stability, ensuring that today’s reforms don’t sow the seeds of tomorrow’s crises. Housebuilders responding with increased supply will be key to this. A balanced approach to regulation and increased supply is crucial for sustainable homeownership for first-time buyers
For now, the future looks brighter for first-time buyers and the market is watching closely.