Lending Cap Change Targets First-Time Buyers
The Bank of England (BoE) has announced a significant easing of its mortgage lending restrictions, allowing UK banks greater room to issue higher loan-to-income (LTI) mortgages. The change is expected to support homebuyers—particularly first-time buyers—and stimulate economic growth, aligning with broader government goals to ease access to credit and improve homeownership rates.
Under the previous rules, lenders were constrained by a 15% cap on the proportion of new residential mortgages that exceeded 4.5 times the borrower’s income. While the aggregate industry-wide cap remains, the BoE has now confirmed that banks can individually go above this 15% limit as long as the sector as a whole stays within bounds.
This move is expected to make mortgage borrowing easier for thousands of applicants who are otherwise locked out of the housing market due to strict affordability tests. The central bank’s Financial Policy Committee (FPC) estimates that the adjustment could lead to up to 36,000 additional mortgages annually for borrowers in the high LTI category—particularly benefitting young professionals and urban renters who have stable incomes but limited deposits.
A Targeted Adjustment With Limited Risk
The BoE insists that this is not a wholesale relaxation of prudential standards. Instead, it is a calibrated shift, designed to offer more flexibility to institutions that have underutilised their existing LTI capacity. According to the BoE, high LTI loans currently represent around 9.7% of all new lending, well below the sectoral threshold. With the new approach, this figure is projected to rise modestly to around 11% by the end of 2025, still within the established limit.
Andrew Bailey, the BoE Governor, made it clear that this shift is not about inflating credit irresponsibly, but rather about enabling more tailored lending decisions. “The affordability rules remain intact,” he said, pointing to existing requirements for affordability testing, loan underwriting, and stress testing under a rising interest rate scenario.
The decision was made after consultation with the Treasury, which had formally requested that regulators assess whether the financial system could better support long-term economic growth. In response, the BoE reviewed its macroprudential stance, ultimately concluding that some flexibility in lending policy could help ease the affordability crisis without posing major systemic risks.
Affordability Barriers Remain Significant
Despite the easing of LTI constraints, the BoE acknowledges that deposit requirements remain the most significant hurdle for first-time buyers. With average UK house prices still hovering near record highs, even borrowers with healthy incomes often struggle to raise the 10–15% down payments typically required by lenders.
Sam Woods, Deputy Governor for Prudential Regulation, stated that the change “will help at the margins,” but that broader housing affordability and supply issues are outside the Bank’s remit. “We’re not loosening the floodgates,” he added, noting that strong capital requirements and internal bank risk controls remain in place.
The BoE’s move comes amid a broader backdrop of cooling house price growth, slightly lower mortgage rates, and a gradual improvement in real wages. Economists suggest that loosening this particular rule may encourage marginal increases in demand, especially in high-cost urban centres like London, Manchester, and Bristol, where LTI ratios are often stretched.
Wider Regulatory Review Underway
In tandem with the mortgage rule adjustment, the BoE also announced it will undertake a review of capital requirements for UK banks, with preliminary findings to be shared in December’s Financial Stability Report. This will mark the first such review since 2019, and comes at a time when central banks worldwide are re-evaluating post-crisis capital frameworks in light of recent macroeconomic shocks.
Sarah Breeden, Deputy Governor for Financial Stability, indicated that while the UK’s current capital buffer regime is “broadly appropriate,” there is room to revisit how buffers are structured and deployed in future downturns. The Bank has also called for international discussions on how macroprudential tools can be better calibrated for future crises, citing lessons from the COVID-19 pandemic and subsequent energy price shock.
Regulators are also preparing to issue new lending rules for smaller UK lenders in the coming weeks. These changes will aim to align the regulatory burden with institutional size and risk exposure, creating a more proportionate supervisory environment for non-systemic institutions.
Though this latest step on LTI lending is relatively modest in scope, it reflects a growing trend within UK financial regulation: rebalancing prudential safety with the need to foster sustainable economic growth. Whether this move provides meaningful relief to struggling homebuyers remains to be seen, but it marks a signal shift in the BoE’s posture—one that suggests a more adaptive stance in an evolving economic climate.