UK Finance said its analysis suggests that a modest rise in lending, enabled by lower stress rates, could improve access to mortgages – especially for first-time buyers – without significantly increasing arrears

A “carefully measured” easing of mortgage lending rules could help more first-time buyers into the market without leading to a significant rise in arrears, according to a banking and finance industry body.

UK Finance said its analysis suggests that a modest rise in lending, enabled by lower stress rates, could improve access to mortgages – especially for first-time buyers – without significantly increasing arrears.

Lenders carry out stress tests to take account of the impact of likely future interest rates rises on a customer’s mortgage payments, when determining whether a mortgage is affordable.

UK Finance said that, despite some sharp rises in interest rates since 2022, most borrowers coming off fixed-rate mortgages faced rates below the levels they were originally stress-tested against. More recently, the BoE base rate has been on a downward path.

Among borrowers now paying above their previous stress test rate, 1.75% are currently in arrears, compared with just 0.21% of those paying below that threshold, UK Finance said.

While lending rules have helped keep arrears low, many potential borrowers have found their ability to secure a mortgage constrained, UK Finance said.

However, any loosening of rules that significantly boosts demand without a corresponding rise in housing supply would likely drive-up house prices, negatively affecting affordability, it cautioned.

In June, the Financial Conduct Authority (FCA) launched a “public conversation” on the future of the mortgage market as part of work to help consumers navigate their finances and to support economic growth. Feedback on its discussion paper will close on September 19.

The FCA is looking at whether there is more that can be done to help first-time buyers, people who are long-term renters with aspirations to get into the housing market, as well as people in later life who may have significant equity in their home but who “may be income-constrained”.

The regulator has said it will focus on how consumers and the market are protected before recommending any rule changes.

Potential changes to lending rules enabling more people to access mortgage finance could involve accepting a greater risk of future arrears.