Article originally published in The Intermediary Feb 2025 – page 72
A key point of gathering and managing data for clients is to support their decision-making. Already, we are seeing changes and opportunities in how the information we have could materially help lenders over the coming months.
Chancellor Rachel Reeves sat down with regulators in early January to suggest boosting growth by relaxing mortgage lending rules should be on the table.
In a letter responding to her call, Financial Conduct Authority chief executive Nikhil Rathi confirmed that this year, they will “begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.”
The FCA letter also restated it will open a consultation on removing maturing interest-only mortgage and other “outdated guidance” and work with Government to remove overlapping standards, for example the Mortgage Charter which came in during 2023 to support borrowers struggling with their mortgage repayments. An article in The Times reported that among the areas expected to be examined include financial stress-testing rules that limit how much first-time buyers can borrow.
Currently, mortgage lenders are required to limit the number of mortgage loans made at or greater than 4.5 times LTI to no more than 15% of their residential lending – the flow limit rule that came in following the global financial crash. Last year Nationwide called on the government to review that limit on the basis that it was constraining lending to first-time buyers. The Intermediary Mortgage Lenders Association said in December that they have consistently argued that the LTI flow limit is not consistent with the wider FCA affordability regime, as it “constrains lending that the FCA regime deems affordable and disproportionately impacts first-time buyers”.
It looks like they may get their wish. Reports also suggest further loosening of stress testing affordability is under review. In 2022, the Bank of England scrapped the mandatory 3 per cent stress test which came in at the same time as the flow limit. However, most lenders still stress-test affordability at or above their standard variable rate, often between 6 and 10 per cent.
If that is relaxed, and rental payments are used more widely to demonstrate affordability it would mean many more first-time buyers would pass affordability tests, opening up wider access to mortgage finance. There’s also talk of cutting capital adequacy ratios for 90 per cent loan-to-value mortgages, which would free up more lenders to offer loans that first-time buyers can afford.
Energy performance
December also saw an interesting move from Halifax on loan-to-income criteria.
They now take into account the energy performance certificate rating of the property when underwriting the borrower’s affordability. The basis for the decision according to Halifax Intermediaries and Scottish Widows Bank head Amanda Bryden is: “We know that typically, more energy efficient homes are cheaper to run.
“Using energy performance certificate data and energy bill analysis, we’re able to reflect that in mortgage affordability.”
Homes with an energy performance certificate rating of A or B will see an increase in the amount Halifax will be able to lend. Homes rated C, D and E will see no change and F and G bands will see a small reduction in the maximum loan amount.
The amounts aren’t huge but there is an incentive for borrowers to go for properties that are more energy efficient. For example, a client looking to buy a property valued at £215,000 could borrow £194,000 if the property has a rating of A or B, versus £191,000 if rated at C to E, or £190,000 if rated at F or G.
It’s an interesting idea, particularly in the context of higher energy bills and the UK’s commitment to cut carbon emissions to net zero by 2050. In 2022, emissions from residential buildings accounted for a fifth of greenhouse gas emissions in the UK, according to government statistics. And the Climate Change Committee, the government’s advisory body, has said the UK will not meet its emissions targets “without near complete decarbonisation of the housing stock”.
While strict standards apply to new build homes, there is still a huge question mark when it comes to cutting carbon emissions from the UK’s existing housing stock. During the Budget, Labour committed £500million to its Warm Homes Local Grant, which rolls out this year and is intended to provide energy performance upgrades and low carbon heating via local authorities. However, the grants are only available to low income households in England. Of homes with an EPC, around 8 million in England – a 58 per cent majority - and 460,000 in Wales, some 62 per cent were rated below band C, according to the Office for National Statistics.
For years now, mortgage lenders have been under pressure to offer green mortgages designed to incentivise borrowers to improve their homes’ energy efficiency. Halifax’s move is an interesting development that will be welcome for some borrowers.
There is a wider consideration however – linking LTI to energy efficiency rewards those who already have energy efficient homes. For those whose homes are hard to upgrade, not suitable for heat pumps or insulation or who cannot afford the outlay, there’s a danger that over time they are penalised on how much they can borrow should the market move in this direction.
Some might argue there is an imperative to lend more against lower EPC banded homes with a contingency that the additional borrowing is spent improving that home’s energy efficiency.
These issues require dependable robust property data and processes for gathering that information if lenders are to make the right steps forward while not excluding some borrowers. There is rarely a silver bullet for big challenges but we know from experience that the right blend of data sets and expertise can turn those challenges into opportunities and make a huge difference to our clients ability to make the right decisions.
