Housebuilding targets are one thing, but we need mortgage reform too
Increasing the supply of new homes won’t make homeownership more affordable by itself – we need new kinds of mortgages too, says James Browne
The government’s planning reforms that aim to increase the housing stock by 1.5m homes by the end of the parliament are a welcome step towards addressing Britain’s housing crisis. But supply alone won’t make homeownership more affordable. Most first-time buyers rely on mortgage finance to purchase their homes, so improving affordability must go hand in hand with expanding access to lending. Without it, new homes risk being bought by landlords or wealthier second homeowners rather than those trying to get on the housing ladder.
It’s encouraging, then, that the government is beginning to address this with reforms to the mortgage market. Two measures that Tony Blair Institute has been calling for have recently been announced which could make a real difference to prospective homeowners.
Freedom to buy
First, the Chancellor’s Mansion House speech confirmed the introduction of a permanent ‘Freedom to Buy’ mortgage guarantee. This scheme will insure lenders against losses on 95 per cent loan-to-value mortgages, reducing the perceived risk of low-deposit lending. That, in turn, should draw more banks back into this segment of the market and make it easier for first-time buyers to secure loans with smaller deposits.
This isn’t the first time a mortgage guarantee scheme has been tried – there’s been a temporary version in place since 2021. But the temporary nature of the previous scheme meant it never became embedded in the market. For greater success this time round, the government must ensure that capital requirements – the reserves banks must hold to cover potential losses – are lowered for mortgages covered by the new ‘Freedom to Buy’ guarantee, so that the reduced risk of these mortgages is reflected in lower costs to lenders.
Beyond raising a deposit, another major barrier for first-time buyers is securing a large enough mortgage. One solution to allow first-time buyers to borrow more is through long-term fixed-rate mortgages, where repayments remain stable over the life of the loan, reducing the risk that higher interest rates make repayments unaffordable later on.
However, existing regulations pose a significant barrier. The Loan to Income (LTI) Flow Limit prevents more than 15 per cent of new mortgages from exceeding 4.5 times the borrower’s income. The Prudential Regulation Authority recently announced that individual lenders may apply for exemptions, the cap still applies to the market overall. The PRA should look favourably on new entrants to the market offering long-term fixed rate mortgages who will no doubt be among the first to apply for an exemption, in line with TBI’s previous recommendation that long-term fixed rate mortgages should be exempt from the Loan to Income Flow Limit.
Further regulatory reform could unlock this part of the market. Regulators should clearly state that they are neutral between short- and long-term fixed-rate mortgages and confirm that recommending long-term fixed products would not constitute mis-selling even if interest rates later fall.
Britain’s housing crisis is complex and will require coordinated action across many fronts. The government’s moves to boost housing supply are important, but must be matched with demand-side reforms that make ownership a real possibility for aspiring buyers
And more could be done on the supply side too. In other countries, life insurers play a crucial role in backing these products. But in the UK, under Solvency II rules assets with prepayment risk – where borrowers can repay loans early – are unattractive to insurers. Reforming these rules to allow such assets to qualify for the favourable ‘matching adjustment’ provided extra capital is held, would help channel institutional funding into securities backed by long-term fixed rate mortgages.
Britain’s housing crisis is complex and will require coordinated action across many fronts. The government’s moves to boost housing supply are important, but must be matched with demand-side reforms that make ownership a real possibility for aspiring buyers. Recent mortgage market interventions are a step in the right direction, but more is needed to return to the homeownership levels seen in the early 2000s.
James Browne is senior policy advisor, economic policy at the Tony Blair Institute