Larger loans, smaller deposits and fewer affordability tests have made a comeback as the government seeks to boost economic growth and homeownership.

But experts who helped to introduce tougher mortgage rules after the financial crisis have warned of the dangers of relaxing the lending restrictions that were designed to protect borrowers and banks.

Most high street lenders have eased the stress tests used to check whether homeowners could still afford their repayments if interest rates rose. It has also become easier to borrow more, relative to your income, and to find a mortgage if you have less than a 5 per cent deposit.

Some 11 lenders, including Barclays, HSBC, Nationwide Building Society and NatWest, now allow applicants to borrow at least six times their salary, while on Tuesday Santander released a deal for homebuyers with as little as a 2 per cent deposit.

Some lenders do not require a deposit at all, and the share of new mortgages available at more than 95 per cent loan to value (LTV) in the third quarter of last year hit its highest level since 2009, according to the Financial Conduct Authority (FCA), the City regulator. Loans at more than 95 per cent LTV are still rare, however, accounting for 0.59 per cent of all new loans.

Banks and building societies say that their more generous lending will help more people to get on the ladder at a time of high house prices. The average home in England cost 7.7 times the average salary in 2024 while the average home in Wales was 5.9 times the average salary, according to the Office for National Statistics.

Sir John Vickers, the chairman of the Independent Commission on Banking after the financial crisis, said: “History has had repeated examples of relaxations of regulation followed by crises, followed by tightening of regulation. And then it repeats. It’s important that we don’t let ourselves go back into that sort of cycle.”

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The rules on the amount of capital that banks have to hold to safeguard against insolvency could be relaxed from 2027, under plans announced by the Bank of England in December.

Vickers said he was concerned that more high LTV lending coming at the same time could put banks in a precarious position. “If banks have plenty of equity capital then we can be much more relaxed about LTV ratios and so on. It’s when they’re sailing close to the wind on equity capital that we have to be concerned about all those other aspects too.”

Sir Charlie Bean, the deputy governor of the Bank of England between 2008 and 2014, said: “The government wants to push for increased mortgage availability and encourage looser requirements. That may well be at the cost of increasing the risk to financial stability further down the road, particularly if it’s pushed too far.”

The FCA is about to run a consultation on further changes to the lending rules, including making it easier for first-time buyers to take out interest-only mortgages. Some argue that this could be a good thing if it gets more people on to the housing ladder and out of renting, which is often more expensive. But there are worries that the trade-offs have not been fully considered.

Charles Randell, a former chairman of the FCA, said: “The system is much better capitalised than it was before the financial crisis and we’re not seeing the mad products and lack of investigation of affordability that got people into trouble in 2007 and 2008.

“However, politicians need to accept that if you loosen the regulatory requirements, that could mean higher defaults in a downturn and there could be mortgage prisoners who find themselves in default and unable to remortgage if their lender won’t or can’t offer them another deal.”

The tough rules

Rules were tightened up to stop the risks of borrowers defaulting on loans and so leaving banks needing to be bailed out by the taxpayer again.

While there were no specific rules about low-deposit loans, the Financial Services Authority (which was replaced by the FCA in 2013) warned in October 2009 about possible “toxic” combinations, such as high LTV lending to those with unstable incomes. As a consequence, mortgages for those with less than a 5 per cent deposit largely disappeared.

Since April 2014 borrowers have had to pass affordability and stress tests and anyone wanting an interest-only mortgage has had to prove that they have ways of repaying the loan, such as from investments or by selling a business.

In 2016 the proportion of a bank’s mortgages that could be issued at more than 4.5 times the borrower’s income was capped at 15 per cent a year. The Bank of England also forced lenders to test whether applicants could afford their mortgage repayments at a rate 3 percentage points higher than they were paying.

Bean, who was on the Bank of England’s financial policy committee at the time, said: “We were getting worried that as the economy was getting back to a reasonable growth rate and the housing market was starting to pick up, there were signs that mortgage lenders were starting to become a bit more risk-loving, and that there was a risk of them extending too many high loans relative to incomes.

“If you have a lot of high loan-to-income ratio mortgages, there’s more chance of those defaulting if interest rates rise or if there’s a recession, and so potentially more risk of the bank getting into trouble.”

Time to relax the rules?

Some of these restrictions are now being chipped away. The Bank of England requirement to test affordability at 3 percentage points above a borrower’s agreed mortgage rate was removed in 2022. And last March the FCA suggested that lenders could be even more flexible with their own stress-testing rules, which it said might be “unnecessarily restricting access to otherwise affordable mortgages”.

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But, while interest rates have come down recently — the Bank of England base rate is 3.75 per cent, having been cut six times from 5.25 per cent in July 2024 — it could be risky to assume that rates will not rise again. After more than a decade of rock-bottom rates following the financial crisis, they rose rapidly during 2022 and 2023 as the Bank of England tried to tackle soaring inflation.

Randell said: “It’s not inconceivable that there will be a big geopolitical event that drives up inflation and leads to a recession, so that interest rates remain high, or even go up, and people struggle to pay their mortgages because of unemployment or reduced working hours.”

The Bank of England began a review into the 15 per cent cap in July, and said that lenders could apply for permission to exceed it, as long as the overall average of such mortgages across the industry did not exceed 15 per cent. It is planning a consultation with industry insiders on the same subject this year. Before the cap in 2014, only about 10 per cent of new mortgages were issued at more than 4.5 times a borrower’s salary.

Bean said: “Easier lending rules enable some people to get on the housing ladder now, but we know the general effect is just to drive up house prices. And it doesn’t really solve the problem, which is the lack of housing. We have a track record in this country of continually acting on the wrong side of the market — trying to act on the demand side and make it easier for people to borrow, instead of really acting on the supply side.”

The rules, however, are still far tougher than they were in the risky lending days before the financial crisis. Chris Sykes from the mortgage broker MSP Financial Solutions said most low-deposit loans required buyers to fix for at least five years to reduce the risk of them being left in negative equity.

“And we now have more strict measures in place to define what is affordable; borrowers are not allowed to self-certify their incomes like before; and there are strict criteria around things like interest-only,” he said. “We are miles away from how things were before 2008.”