Easing stringent mortgage stress testing rules could cause house prices and first-time buyer numbers to rise, according to research.
More relaxed mortgage stress tests could see the number of first-time buyers purchasing a home rise by 24 per cent, or more than 80,000, over the next five years, Savills claims.
Its analysis suggests more relaxed mortgage rules could boost first-time buyer transactions by between 14 per cent and 24 per cent.
However, easing mortgage stress tests could also cause property prices to rise by between 5 per cent to 7.5 per cent in five years, Savills added.
It said: ‘Transactions and house prices are strongly linked – the more relaxed borrowing drives up house prices, the less impact there will be on transactions.’
Following a change in Bank of England guidance in March, mortgage lenders are no longer required to stress test borrowers at the standard variable rate plus 1 per cent, so long as borrowers take on a fix of less than five years.
Impact: Easing stringent mortgage stress testing rules could cause house prices and first-time buyer numbers to rise, research claims
Stress tests are the part of a mortgage application where the lender checks that the borrower could still cope if their interest rate increased.
Major lenders, including Halifax, HSBC, Nationwide, Natwest and Nationwide, have altered their mortgage stress tests to reflect the change.
Lenders have come under pressure from the Financial Conduct Authority to act.
Earlier this year, the FCA said that amid falling interest rates, the market approach to interest rate stress testing may be ‘unduly restricting access to otherwise affordable mortgages.’
Next month, the FCA will open a public discussion on the future of the mortgage market.
Lucian Cook, head of residential research at Savills, said: ‘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.’
He added: ‘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.’
Savills claimed relaxed lending rules will increase the number of buyers, which in turn could drive up house prices. How much prices will rise will depend on how much new housing stock is delivered to meet the additional demand, it added.
Savills 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.
The analysis assumed 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.
Santander was the first major lender to update its mortgage stress tests in March and reduced all of its stress test rates by 0.75 per cent, bringing them to the lowest level since 2022.
Santander said this meant many customers applying for a residential mortgage from it could now borrow between £10,000 and £35,000 more than previously, depending on their individual circumstances and subject to affordability checks and loan to income limits.
In April, HSBC and First Direct announced changes to the stress rates used in their mortgage affordability calculations.
HSBC said the changes could enable 20,000 more customers to get a home loan with the bank alongside being able to borrow larger amounts as part of a mortgage.
First Direct, which is part of HSBC, said the move could benefit around 85 per cent of mortgage applicants, allowing them to borrow an average of £22,000 more.
On 30 May, Clydesdale Bank and Virgin Money announced that the stress test rate applied for their residential mortgages had been reduced where the mortgage is variable or fixed for less than five years.
Do the changes go far enough?
Banks are allowing borrowers to stretch their finances further because the regulatory environment has shifted.
Recent guidance from the FCA encourages lenders not to unduly restrict access to mortgages that are affordable, especially as interest rates begin to stabilise.
Speaking to This is Money, Nicholas Mendes, mortgage technical manager at broker John Charcol, said: ‘For some, particularly first-time buyers with stable incomes, this could be the change that allows them to finally get on the housing ladder.
‘However, the Bank of England’s long-standing cap on high loan-to-income (LTI) lending – the 15 per cent rule – remains in place.
‘Introduced over a decade ago to limit systemic risk in the wake of the financial crisis, it now sits awkwardly alongside stricter stress testing and more robust capital requirements.
‘As a result, there’s a tension: while more borrowers now qualify under the updated affordability criteria, lenders are constrained in how many of those loans they can actually issue.
‘This often forces difficult decisions and can skew support towards higher-income borrowers or larger loans, rather than helping first-time buyers.
‘There’s no doubt the changes reflect a more accurate and arguably fairer view of affordability, removing some of the overly cautious buffers that were shutting people out.
‘For many, it’s a welcome shift. But it’s not without risk. Higher borrowing – even if technically affordable today – leaves households more exposed to future financial shocks, whether through rising rates or changes in personal circumstances.
‘If too many borrowers take on more debt simultaneously, it could reintroduce the very vulnerabilities the original rules were designed to prevent.’
He added: ‘Without tackling the underlying issues – namely high prices and limited supply – long-term affordability will remain out of reach for many.
‘Ultimately, this shift is about adapting to current conditions. But responsible lending and clear financial advice remain critical. Just because someone qualifies for a bigger loan doesn’t necessarily mean it’s the right decision for them in the long run.’