Credit where credit’s due?

This briefing note considers the distributional impact of the post-financial-crisis tightening of Britain’s mortgage lending rules on aspiring homeowners and assesses how policy could respond to help poorer families unable to get on the housing ladder today.

Britain’s system of financial regulation became significantly more restrictive in the years after the financial crisis, raising a concern that these changes have unduly locked some households out of homeownership. Since the crisis, the number of mortgagors among low-to-middle income households has fallen by three times as much as it has for those towards the top of the income distribution. But our analysis shows that the most significant barrier facing potential first-time buyers is not income-based lending rules: it is the scale of the deposit required. Almost half of the 8.3 million potential first-time buyers we identify would pass the income requirements for a mortgage on a starter home, but just 15 per cent of them would have enough saved for a 5 per cent deposit.

We find that a blanket loosening of regulation risks being counterproductive, as research shows expanding mortgage credit in a context of inelastic housing supply mainly raises prices rather than homeownership. Targeted, government-led support would be a better approach. A Starter Deposit equity loan scheme could provide first-time buyers with a 5 per cent deposit on a starter home – a more targeted approach than previous Help to Buy schemes, costing the government up to £190 million a year against its fiscal rules.