High street banks are keen to hand mortgage borrowers £35k more cash: Here's why

Banks are now allowing home buyers to borrow tens of thousands more when shopping for a mortgage.

Since March, multiple high street lenders have loosened their mortgage rules, allowing people to borrow more when buying a home.

In March, Santander relaxed its 'stress test' - the part of a mortgage application where the lender checks that the borrower could still meet their monthly payments if their interest rate went up.

The change means the average customer would be able to borrow up to £35,000 more, it said.

Santander was followed by Lloyds Banking Group, which has boosted borrowing by an average of £38,000, as well as HSBC, First Direct and Barclays.

This will come as good news to home buyers, especially first-time buyers who typically need larger loans.

But why is it happening now, and what do borrowers need to know?

Mortgage lenders 'stress test' fixed rate mortgage borrowers, checking they would still be able to afford their repayments if their rate went up when their fixed deal ended.

Until the recent changes, someone taking a two-year fixed mortgage charging 4.5 per cent interest might be stress tested on their ability to pay 7.5 per cent.

On a five-year fixed rate, this might be 6.5 per cent - though few banks make their 'stress rates' public.

This gives the bank some confidence that, if the borrower did not remortgage and instead lapsed onto the higher standard variable rate, they could still afford the higher monthly costs.

Banks are allowing borrowers to stretch their finances further now because the regulatory environment has shifted.

Recent guidance from the Financial Conduct Authority encouraged lenders not to unduly restrict access to mortgages that are affordable, especially as interest rates begin to stabilise.

David Hollingworth, associate director at L&C Mortgages, says: 'Stress rates are not typically published but have typically meant using a margin above the reversionary rate, often the SVR.

'As rates have risen, affordability has often become tougher, as stress rates have naturally increased too.

'The regulator has recently issued a reminder to lenders that they have flexibility in how they apply stress rates - and lenders haven't wasted any time in applying that.'

Yesterday, Savills reported that relaxed mortgage stress tests could see the number of first-time buyers purchasing a home rise by up to 24 per cent over the next five years.

That could mean more than , or more than 80,000 people climbing on to the housing ladder.

The estate agent also suggested that easing mortgage stress tests could cause property prices to rise by between 5 per cent to 7.5 per cent in five years, however.

Hollingworth is concerned that without an increase in the number of homes built, looser mortgage lending rules could push up demand and lead to rising house prices.

'If we simply boost the amount of borrowing without building more homes it will ultimately risk pushing house prices higher,' he says.

Mortgage brokers have welcomed the changes as a necessary step to help more people onto the ladder, however.

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Felicity Barnett, lender operations manager at broker, Mortgage Advice Bureau, says: 'By updating a decade-old stress-testing framework and aligning more closely with today's economic reality, they've opened the door to more people who are struggling to get on the property ladder by allowing them to potentially borrow more.

'With the latest Halifax data showing the average house price is now 6.6 times income, these enhanced lending limits could mean the difference between buying locally or being forced to move miles away.

'For many, this is about more than a house - it's about staying close to family, work, and their community.'

However, being able to get a bigger mortgage won't solve the problem of getting on the housing ladder for every would-be buyer.

Nicholas Mendes, mortgage technical manager at broker John Charcol adds: 'For those with stable incomes and strong credit histories, the changes could be the difference between continuing to rent or finally stepping onto the property ladder.

'However, mortgage accessibility is just one part of the puzzle. High house prices and the chronic lack of supply remain the bigger barriers.'

There is also a genuine concern that relaxing the rules could backfire in some cases.

Mendes continues: 'Higher borrowing, even if technically affordable today, does also increase exposure to future financial shocks.

'A change in personal circumstances or a shift in interest rates down the line could put pressure on household budgets, particularly for those who have stretched themselves to the limit.'

While banks may be relaxing their mortgage stress test rules, the other element of affordability is the loan-to-income-ratio.

This is a cap on the amount banks can lend based on someone's annual income.

Most borrowers will only be offered a mortgage of up to 4.5 times their annual household income - though some can be get more.

This is because of a rule imposed by the Bank of England, which states that only 15 per cent of a bank's mortgage book can be made up of loans above the 4.5 times multiple.

The rule was introduced over a decade ago in the aftermath of the financial crisis, in order to reduce risk.

However, some, including Nicholas Mendes argue that today the cap is 'outdated'.

He adds: 'The result is a tension. More borrowers now qualify for higher lending under the updated affordability assessments, but lenders are still constrained in how many of those loans they can offer.

'It forces them to make difficult decisions about who to support, and in many cases, the system inadvertently favours larger loans over first-time buyers.'