All Change in the Mortgage Market

One of the best ways of judging the condition of the housing market, in my opinion, is seeing what’s happening in the mortgage market.

I’m not talking only about mortgage interest rates, important as those are, but also information about mortgage activity often goes unreported in the mainstream media. So, what’s changing?

Mortgage market changes ahead

For example, the number of applicants for mortgages gives a good indication of what the housing market will be doing in, say, three to six months’ time. As applications rise, buyers will be out in force for the following few months, scouting for their next home. Conversely, when application numbers fall, fewer buyers will be around.

Now there are important developments happening in the mortgage market. Although they are unlikely to make an impact for perhaps a year. But helpful for those planning now for a move in 2026.

Broadly speaking, measures are underway to make mortgages easier to get and better suited to today’s property prices.

There’s one important point to remember. Mortgage lenders are tightly regulated and have “learned their lessons” from problems 10 and 20 years ago. Back then, too many mortgages were issued without sufficient checks that borrowers could not afford repayments. The upcoming changes are not a return to those bad old days, just an update of how we secure mortgages. Now, it is fit for the 2020s and beyond.

Relaxing the loan to income ratio

This is more interesting than it sounds!

The loan to income ratio determines how much a mortgage provider can lend to a home buyer. Based on a judgment of the borrower’s gross income.

Lenders have differing criteria, but if the monthly mortgage repayment is a small proportion of the borrower’s gross income, that’s regarded as very low risk. The higher the proportion, the more reluctant a lender may be to offer a mortgage. It means a borrower may have to go to a specialist (and probably more expensive) lender instead.

Some lenders are now being slightly more relaxed on what ratio they will accept. Meaning some people with lower salaries will be granted mortgages.

Reducing ‘stress test’ levels

Again, this sounds technical, but I guarantee it’s important!

Lenders typically check that a borrower could pay a mortgage interest rate two or three percentage points higher than their current one. This gives the lender the comfort that if interest rates unexpectedly rise sharply, the borrower can still afford to pay.

Different banks test borrowers to different ‘stress’ levels, but some are now reducing their worst-case tests. This is because interest rates are generally much more stable these days, and less prone to extreme rises.

The end result of this is that more borrowers can ultimately borrow higher sums. Because they’re judged to have ‘headroom’ to pay more if rates move up again.

Changing mortgage terms and lenders

A typical mortgage ‘term’ (which means the duration of the mortgage) used to be 25 years. However, over the past decade, as house prices have risen while household incomes have remained roughly unchanged, longer terms have become very common.

That trend is gathering pace, too. UK Finance, the trade body which represents almost every mortgage lender, says half of all first-time buyers in the UK. Moreover, over a quarter of existing owners who move home take out a mortgage of 30 years or more.

The reason is obvious: longer terms mean lower and more affordable payments, albeit for a much longer period. This has been particularly helpful for first-time buyers. However, what if circumstances change later on? If you get a better-paid job, a borrower doesn’t want to be saddled with a mortgage for decades to come.

It’s always been possible to reduce the term, but this has been complicated and sometimes costly. Lenders have imposed high one-off charges for changing.

From next month (May 2025), there will be a consultation to make such changes much easier and less expensive. It’s likely to take perhaps a year for changes to be implemented. The theory is that the mortgage market should be more competitive and flexible in that case. This will allow people to switch lenders and alter their mortgage term to take advantage of the best deals.

Other mortgage market changes

Different lenders are doing different and sometimes quite radical things to allow more people to buy homes. Therefore, it’s worth keeping an eye on mortgage announcements. An independent mortgage broker will help you in this.

Some initiatives include:

• More emphasis on fixed-rate mortgages to allow greater financial planning by borrowers;

• Reduced rates for mortgages for homes with good ratings (A to C) on their Energy Performance Certificates;

• More mortgages for improving a home rather than buying a new one;

• At least one lender no longer requires a deposit at all for people purchasing their council flat or house via the Right to Buy scheme.

Why these mortgage market changes now?

A number of reasons lie behind the quite radical shake-up of the mortgage market, likely in the next year or two.

Firstly, many of the restrictions and tests currently used were set in 2014, in response to a global financial crisis, and have not been updated since.

Secondly, house prices have risen steeply. In 2014, the average house price was £188,559, but now it’s £271,316. For many first-time buyers in particular, affordability is a problem under current mortgage rules.

Thirdly, the government wants more people to own homes. Earlier this year, Chancellor Rachel Reeves told financial authorities to consider changing how they regulate mortgages. They aim to find new ways to boost growth and home ownership. She made the point that arrears remain very low by historic standards, so the 2014 controls could be relaxed, at least slightly.

Remember that whatever your plans, short or long-term, an independent mortgage adviser is always a good first port of call. This will help you get a grasp of what’s happening in the mortgage market and how changes can benefit you.

Last Updated: May 14th, 2025