Strict mortgage regulations deter potential first-time buyers

New research by the Intermediary Mortgage Lenders Association (IMLA) highlights that overly stringent mortgage regulations may be discouraging renters from becoming first-time buyers. This trend has contributed to a significant shortfall in new homeowners since the financial crisis.

Impact of Regulatory Measures
The research indicates that the cumulative shortfall in first-time buyer numbers has reached 3.1 million by the end of 2023. Despite favourable affordability during the ultra-low interest rate years from 2013 to 2022, first-time buyer numbers did not recover to the levels expected from previous trends.

IMLA’s analysis reveals that mortgage repayments took up less than 30% of a first-time buyer’s income during two key periods of excellent affordability: 1993 to 2003 and 2013 to 2022. In the first period, first-time buyer numbers averaged 500,000 a year, but in the second, the average dropped to just 330,000.

One possible explanation for this muted resurgence is the stringent regulations implemented post-financial crisis, such as higher capital requirements for high Loan To Value (LTV) lending and the Bank of England’s rule limiting lending at or above 4.5 times income to no more than 15% of lenders’ advances.

The Rising Cost of Homeownership
The effect of these regulations has been exacerbated by rising interest rates, leading to a sharp decline in first-time buyer numbers from 405,000 in 2021 to 257,000 in 2022. The research also highlights that it is now more expensive to buy than rent in every UK region except the North West, Scotland, and Northern Ireland. This marks a significant shift from IMLA’s last affordability analysis in September 2021, when it was cheaper to buy than rent in all regions. Despite a 22% rise in rents nationally and 24% in London between September 2021 and April 2024, buying has become more costly.

Broader Implications and Recommendations
Kate Davies, executive director of IMLA, emphasised the wider implications of declining homeownership: “Homeownership brings a range of invaluable benefits to individuals and their families, not just in terms of the accumulated wealth it confers but the peace of mind afforded by security of tenure. It can also benefit wider society, helping to build settled communities.”

Davies warned that falling first-time buyer numbers lead to increased demand in the private rented sector, driving up rents and placing further strain on the social rented sector. “Falling first-time buyer numbers means rising demand in the private rented sector, pushing up the cost of rents and increasing the challenge facing tenants, including growing numbers of older people forced to rent into retirement. This in turn puts greater pressure on the social rented sector, already bursting at the seams,” she said.

IMLA calls on the government to reassess the regulatory barriers to homeownership. Davies concluded, “IMLA believes that government can help future first-time buyers by examining the regulatory barriers to ownership. We believe that it would be beneficial for consumers if government were to establish a framework for regulators where the interests of future first-time buyers are explicitly recognised, with affordability regulations reassessed accordingly.”

Stringent mortgage regulations intended to stabilise the market post-financial crisis may now be hindering potential first-time buyers. Reassessing these regulations could help boost homeownership and alleviate pressures on the rental market.