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 analysis from Savills.
Several lenders have recently boosted mortgage affordability in response to updated regulatory guidance which allowed lenders to set lower ‘stress rates’ to check that borrowers will still be able to afford their payments if interest rates increase in the future.
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 five years).
Already, several large lenders have modified the way they apply the affordability test, although their approaches vary.
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.
What could happen to transactions and house prices?
Relaxed lending rules are expected to increase the number of buyers, which in turn is expected to drive up house prices, although 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, the analysis shows that stress tests could increase first-time buyer transactions by 47,000 in a higher house price growth scenario, or 80,000 on a lower price growth scenario (a 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, Savills says.
However, it noted that transactions and house prices are strongly linked – the more relaxed borrowing drives up house prices, the less impact there will be on transactions.
Lucian Cook, head of residential research at Savills, commented: “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.
“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.”
