Eased Lending Standards May Substantially Increase First-Time Homebuyer Activity

Changes in the way lenders stress test borrowers could increase first-time buyer transactions by up to 24% over the next five years, according to the latest analysis from property firm Savills.

Following a change in Bank of England guidance in March, lenders are no longer required to stress test borrowers at the Standard Variable Rate plus 1% (if borrowers take on a fix of less than 5 years).

Already, several large lenders have modified the way they apply the affordability test, although their approaches vary (see Table 1).

Savills has quantified the impact of the new stress test regulations by comparing mortgage costs as a percentage of income under the previous stress-testing criteria, with the outcomes under less stringent interest rate scenarios.

This approach identifies how key lending metrics shift when stress tests are applied at different rates to maintain a consistent level of affordability, while maintaining reasonable loan-to-income and loan-to-value ratios.

The analysis assumes that half to three-quarters of the increased borrowing capacity is added to the borrower’s purchase price, either allowing them to buy something bigger or better or because of house price growth.

Relaxed lending rules are expected to increase the number of buyers, which in turn is expected to drive up house prices; the amount depends on how much new housing stock is delivered to meet the additional demand.

Based on the historical relationship between loan-to value ratios and activity levels, stress tests could increase first-time buyer transactions by +47,000 in a higher house price growth scenario, to +80,000 on a lower price growth scenario (+14% to +24% increase).

This could cause house prices to rise by an additional +5.0% to +7.5% on top of existing five-year forecasts.

“Relaxed lending rules will certainly change the course of travel for the housing market in the medium to long term, but there will be a strong interplay between the extent to which house prices and first-time buyer transactions increase. The more increased borrowing capacity impacts prices, the less impact there will be on transactions,” comments Lucian Cook, head of residential research at Savills.

“Change would not be immediate, with the impact on house prices and transactions likely to take place over a period of five years. The current uncertain economic outlook is likely to hold back buyer confidence and willingness to take on substantially more debt in the short term.”

“But in the medium to long term, the market would feel the knock-on impact of a widening pool of buyers. This will be good news for housing delivery but it’s unlikely to be enough to allow the government to hit its housebuilding targets.”

Baseline Example:

Current stress tested affordability (at 8.25%) comes out at just under 30% of household income for a first-time buyer with an average household income of £62,000 buying a house worth £260,000.

Scenario 1 – Stress test reduced to 7.00%; 50% of additional borrowing is passed on to house prices

• Extra borrowing capacity = +£25,900 (+12.8%).
• Average Loan to Income (LTI) ratio rises from 3.26 to 3.68.
• If half of that (£12,950) goes to purchase price → house prices increase by 5.0%.
• Average Loan to Value (LTV) rises from 77.7% to 83.5%:
  • Average First-Time Buyer (FTB) deposit drops from £58k to £45k (-22%).
• Estimated number of mortgaged FTBs rises from 340,0000 to 420,000 (+24%).

Scenario 2 – Stress test reduced to 7.00%; 75% of additional borrowing is passed on to house prices

• If three quarters of extra borrowing capacity (£19,425) goes to purchase price → house prices increase by 7.5%.
• Average Loan to Value (LTV) rises from 77.7% to 81.6%:
  • Average First-Time Buyer (FTB) deposit drops from £58k to £51.5k (-11%).
• Estimated number of mortgaged FTBs rises from 340,0000 to 387,000 (+14%).

Table 1: Lender responses