Mortgage regulation delivers stable market at the expense of consumers’ access to finance

18 November 2016

New IMLA report – Is the mortgage market working for consumers

  • White paper explores whether post-financial crisis regulation has impeded consumers’ ability to access the mortgage finance they need to get on the property ladder
  • Mortgage pricing and the efficiency of the application process have been affected by increased regulation
  • IMLA calls on the FCA’s Competition Review to recognise the role regulation plays in consumer access to mortgage finance, and for an independent assessment of the impact of mortgage regulation

New research from the Intermediary Mortgage Lenders Association (IMLA) explores whether policymakers’ regulatory approach in the wake of the financial crisis has created a market that prioritises stability over popular access to mortgage finance.

IMLA’s report, ‘Is the mortgage market working for consumers?’, suggests that consumers’ number one priority when it comes to getting a mortgage is being able to access the amount of credit they feel sufficiently meets their needs. This is supported by IMLA’s most recent Intermediary Lending Outlook research, which reveals the biggest frustration that borrowers experience in the mortgage marketplace is having their borrowing limited by affordability constraints, which was identified by 70% of lenders and 67% of brokers as the number one frustration.

While policymakers were broadly comfortable with consumers borrowing as much as they needed before 2007/8, with the regulatory regime tolerating self-certified income verification, the financial crisis led to a marked shift in policy. This new approach manifested itself in several pieces of regulation, including caps on loan-to-income (LTI) ratios, the Mortgage Market Review (MMR), and the revised Basel 3 Accord.

Polices like the MMR have had the explicit goal of preventing borrowers from over-stretching themselves, while policies aimed at lenders like Basel 3 have raised capital requirements for financial institutions. These changes have subsequently resulted in the reduced availability of non-prime mortgage products and high-LTV loans compared to a decade ago.

This has had a clear impact on some consumers’ ability to access mortgage finance in recent years. IMLA’s Intermediary Lending Outlook research also found brokers have been having difficulty in sourcing mortgages for some groups of prospective borrowers – many of whom require a more flexible approach to affordability and risk. The research found 51% of brokers had been unable to source a loan for a client seeking an interest-only loan, 49% for borrowers with adverse credit, and 46% for a self-employed clients with irregular incomes.

Poorer mortgage accessibility has also impacted on the market beyond an individual level. A report by the Nottingham Building Society in August 2016 found the biggest cause of housing transaction failures was mortgage finance falling through, which accounted for 34% of all failures**. Older research from the Council of Mortgage Lenders (CML) also suggested that lower mortgage availability was having an impact on homeownership, with the research estimating that there were two million households who might have expected to become homeowners since the downturn who were unable to fulfil this ambition as a consequence of these rules.

Policymakers have paid increased attention to homeownership in recent years, launching several schemes designed to increase owner-occupancy levels. However, by narrowing access to mortgage finance in pursuit of a more robust regulatory regime, they have effectively dampened non-standard borrowers’ prospects for homeownership and made the market less inclusive. Meanwhile lenders find themselves caught between the legitimate aspirations of consumers and politicians, and the constraints of an expanding regulatory framework.

Peter Williams, Executive Director for IMLA, comments: “Following the financial crisis, policymakers and regulators have rightly sought to increase the stability of the mortgage market through several different pieces of regulation. While these polices have reduced risk, they have also reduced non-standard borrowers’ ability to access the mortgage finance needed to get on the property ladder. In order to promote stability, the regulatory regime has effectively created a narrower mortgage market – which is bound to have frustrated the would-be borrowers affected. While the market is still working for borrowers with large deposits and stable jobs, Britain’s growing number of non-standard borrowers face several regulatory imposed hurdles.

“While it is hugely important that market stability is supported, it is questionable whether such a tight regulatory approach is compatible with policymakers’ goal of increasing popular homeownership. It is therefore hugely important that the FCA’s planned Competition Review assesses the role regulation plays in limiting consumer access to the mortgage market.

Pricing, transparency, understanding and process
The impact of this increased regulation on consumers’ fortunes in the mortgage market is not just limited to reduced mortgage accessibility, however.

‘Is the mortgage market working for consumers’ identifies mortgage pricing as the second most important factor for consumers when it comes to getting a mortgage. While pricing has been improving for consumers as a result of falling rates and lower lender margins, spreads on new loans are higher than they were before the financial crisis. Although the cheapest lifetime base rate tracker available today is just 1.5% higher than the base rate, trackers were as low as 0.19% above base in the mid-2000s. Furthermore, the differences in the price available to the lowest risk customer and groups who require higher-LTV products has grown wider as a result of the Basel 3 Accord’s stipulations.

While the efficiency of the application process is typically less important to consumers than accessibility, price, and transparency, it is apparent that regulation has had an impact on this part of the customer journey. The MMR has introduced a lengthy income-verification process, which has slowed the approval process and increased the amount of time consumers must spend on their applications with lenders or brokers. In the recent Intermediary Lending Outlook research, 67% of lenders cited too much paperwork as one of the biggest frustrations for consumers when applying for a mortgage.

Peter Williams concluded: “While mortgage accessibility is consumers’ number one priority when it comes to getting a mortgage, there are several other important parts of the customer’s experience that have been affected by this regulatory shift. Some borrowers are faced with higher prices as a result of higher capital requirements, and the applications process has grown longer and more frustrating.

“As a result of this shift away from a market focused on consumers’ interests, IMLA will continue to argue the case for an independent assessment of mortgage regulation to be taken. The regulatory reviews that have been undertaken have been helpful but in essence the FCA is assessing itself. It is important to ascertain whether the interest of excluded borrowers are properly weighed against the benefits of the current regulatory regime.

*IMLA Intermediary Lending Outlook research, summer 2016
**Nottingham Building Society (NBS), August 2016

For further information or to request a copy of the research report Is the mortgage market working for consumers? please contact:

Rob Thomas, Director of Research, Instinctif Partners, 020 7427 1406
Barney McCarthy/ Will Muir/ Sam Ferris, Instinctif Partners, 020 7427 1400 /

Notes to Editors

About IMLA

The Intermediary Mortgage Lenders Association (IMLA) is the trade association that represents mortgage lenders who lend to UK consumers and businesses via the broker channel. Its membership of 52 banks, building societies and specialist lenders include 18 of the 20 largest UK mortgage lenders (measured by gross lending) and account for about 90% of mortgage lending (91.6% of balances and 92.8% of gross lending).

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