Mortgage shake-up could see homeowners handed £19,000 boost on house prices

According to research by estate agent Savills, adjustments to lending practices could boost first-time buyer transactions by between 14 per cent and 24 per cent, potentially helping more than 80,000 additional buyers onto the property ladder.

The average deposit required by first-time buyers could fall from £58,000 to as little as £45,000 over the same timeframe.

Major lenders including Santander, Lloyds, HSBC, NatWest and Nationwide have already implemented more flexible stress testing following Financial Conduct Authority guidance changes in March.

The FCA reminded lenders in March that they are permitted to adjust their stress testing based on market expectations, noting that existing approaches could be restricting borrowers' access to affordable mortgages

Previously, lenders typically tested whether borrowers could afford mortgage rates two or three percentage points higher than their current rate.

Under the new approach, banks can now test based on what they believe their future rates are likely to be, rather than using their standard variable rate plus approximately one per cent.

This shift has enabled borrowers to access tens of thousands of pounds in additional lending.

The stress tests were originally introduced by the FCA in 2015 to prevent another 2008-style market collapse and were made more rigorous in 2022 following Liz Truss's mini-Budget.

The changes could particularly benefit first-time buyers struggling with deposit requirements. Savills' analysis indicates the average first-time buyer deposit in London has already reached six figures, making the potential reduction to £45,000 nationally significant for prospective homeowners.

Major lenders now allow borrowers to take out mortgages of up to £40,000 more than previously permitted. This increased borrowing capacity comes as mortgage rates have been falling steadily across the UK following Bank of England base rate cuts.

While this has allowed some buyers to borrow more - it could lead to a surge in demand that may hike up house prices.

House prices surged by 0.5 per cent in May, reversing a decline seen the previous month, the Nationwide Building Society has said. The month-on-month climb brought the average UK house price to £273,427 following a 0.6 per cent decrease in April.

According to Moneyfactscompare.co.uk, the average two-year fixed-rate mortgage currently stands at 5.12 per cent, down from 5.93 per cent a year ago.

The average five-year fixed residential mortgage rate has decreased to 5.09 per cent from 5.50 per cent over the same period.

Lucian Cook, head of residential research at Savills, said: "Change would not be immediate, with the impact on house prices and transactions likely to take place over a period of five years. But in the medium to long term, the market would feel the knock-on effect of a widening pool of buyers."

He added that whilst the changes would be "good news for housing delivery", they were "unlikely to be enough to allow the Government to hit its housebuilding targets".

Mark Eaton, chief operating officer at April Mortgages, warned: "Reducing stress testing on short-term mortgage products to help people borrow more money is a potentially risky manoeuvre."

He suggested that longer-term fixed rate products may offer a safer alternative.

Emma Reynolds, the City minister, said: "For too long politicians have ducked and dodged the decisions needed to support homeownership.

"Simplifying responsible lending rules and putting in place a permanent mortgage guarantee scheme shows our commitment to making the dream of owning a home a reality."

Housing Minister Matthew Pennycook added: "The affordability challenges facing first-time buyers mean that we now have a generation locked out of homeownership.

"This Government is determined to change that, ensuring that young families and hard-working renters can buy a home of their own."

The Bank of England base rate currently stands at 4.25 per cent, down from 5.25 per cent last summer.

Further reductions are expected this year, with at least one more predicted before 2026.