Tweaks to rules for mutuals, challenger banks would boost home ownership

Revising capital rules, loan-to-income (LTI) ratios and lifting the cap on how many high loan-to-value (LTV) mortgages lenders can have on their books would help get thousands more people on to the property ladder. Susan Allen, chief executive of Yorkshire Building Society (YBS), said if the rules were changed she could help an extra 2,000 people into home ownership.

Giving evidence to the Treasury Committee on May 21, Allen said that last year YBS made a profit of £385 million and had losses of £1 million but was required to hold £4 billion of Tier 1 capital and further £1.5 billion in its minimum requirement for own funds and eligible liabilities (MREL).

“That gives you a sense of the capital that is tied up in the organisation,” she said, adding that the Prudential Regulation Authority (PRA) should look at complexity of business models, not just size of an institution, when deciding on capital requirements.

“Yes, we are a larger lender, but we are actually a very conservative lender with very narrow business lines. We are talking about secured lending and savings; we are not talking about unsecured or any other type of finance,” Allen said.

YBS would welcome “constructive conversations” with the PRA on whether capital restrictions should be based on “scale or complexity”, she said.

Stuart Haire, chief executive of the Skipton Building Society, agreed. Skipton was required to hold £3 billion of capital but had losses of “less than £2 million” low mortgage arrears rates, he said.

“Therefore, there is a lot of pent-up demand before you even reach a point where you will be running the risk of underwriting people who might not be able to afford it,” he added.

IRB waivers

Lack of an internal ratings-based (IRB) waiver is also hindering lending, Atom Bank chief executive Mark Mullen told the committee. IRB waivers allow banks to model their own credit exposures and calculate capital.

Just 10 institutions, with an average operating age of 141 years, have them. “If you are a new bank — we are a 10-year-old bank — you think, ‘Is that the qualification: you have to have an age of 141 to get into that club?’ You will forgive me for lacking a little enthusiasm or optimism about the prospect of our ever getting there,” Mullen said.

Granting of an IRB waiver had a “magical” effect on an institutionʼs ability to lend, he added, giving those 10 lenders a huge capital advantage. Leeds Building Society, which was “admitted to the IRB club” in 2018, saw its growth rate lift to 63% over the past five years.

The Financial Conduct Authority’s (FCA) review of mortgage advice rules should help bring down the cost of a mortgage, according to Mullen, as the current rules added friction and cost. Atom Bank had £3.4 billion in mortgage loans, Mullen said, compared to UK-wide total outstanding mortgage loans of £1.6 trillion.

Loan-to-value

Under current LTI rules, lenders can only provide a loan of up to 4.5 times a borrowerʼs income. They are also restricted in the percentage of high LTV (where a house buyer has borrowed over 90% of the total value of a property) they can hold, currently capped at 15% of their total mortgage book.

Debbie Crosbie, chief executive of the Nationwide Building Society, said a small increase in the percentage of high LTV loans allowed would create a “significant opportunity to help first time buyers”.

“We do a lot of this type of lending, we are very good at it and our arrears levels are very low,” she added.

YBS’s Allen suggested the percentage should be lifted to 20% as this would allow lenders to be more innovative.

“We launched a product last year that we called a ‘£5k deposit mortgage’. It does what it says on the tin: it is a £5,000 deposit, and we will lend you up to £500,000. It started on houses and is now extended to flats as well,” she said.

She pointed out the ratio between average salary and average house price was currently 7.2 — far higher than the 4.5 allowed by regulation, so there was scope to raise the LTI ratio.

Government action

Several of those giving evidence to the committee argued that more must be done to increase the number of homes being built alongside steps to increase lending for homebuying.

Haire said supply would only increase after all the proposed reforms to the UK’s planning system go through, while Allen called for a long-term strategy to ensure that the right type of homes were being built, in the right locations.