Lenders have been “too cautious” in granting first-time-buyer home loans under current rules, according to the Financial Conduct Authority.

FCA chief executive Nikhil Rathi (pictured) argued that under existing regulatory rules lenders have a degree of “flexibility” over the stress tests they apply to homebuyers coming to the market for the first time, which they have not exercised.

Rathi was speaking before the Treasury Committee this morning, which came as the City watchdog published its five-year plan promising to “streamline” its priorities and take a less “prescriptive” approach to regulation.

But the leader of the UK’s largest regulator added that lenders could do more to support FBS and warned that looser lending would inevitably mean more defaults.

Rathi said: “Already, lenders can exercise judgement over how they do the stress tests and we think that some lenders are being too cautious at the level of interest rate they are stressing against.”

He added: “We know that rents are very high in many parts of the country, and people may be demonstrably able to pay those high rents, and they manage to sustain their finances in doing so, and yet, if their monthly mortgage payment is somewhat lower than that rent, that might still not meet some of the affordability tests that are there.

“We have to ask the question, is that a sensible position for us to be in, or do we need to show a little bit more flexibility in that area?”

Rathi’s comments come after UK Finance called for the existing 4.5 times loan-to-income limit set at 15% across a major lender’s portfolio to be eased last week.

Last month, Nationwide also called for this limit to be lifted after being forced to pull back lending on its Helping Hand mortgage range aimed at FTBs, as it risked breaching current rules.

However, Association of Mortgage Intermediaries senior adviser Robert Sinclair last month agreed that flexibility is written into some stress testing rules.

Sinclair said: “Lenders can already exceed the ‘standard variable rate plus 1%’ ruling if they can justify their thinking to the regulator.

“Regulators argue that this is already in the gift of lenders, and what they actually want is regulatory cover to do what they are already allowed to do.”

The FCA said it would consult with lenders and consumer groups over stress test rules.

Rathi added: “We intend to relax lending standards to allow more FTBs to come into homeownership, but we can’t do that and at the same say there will be fewer defaults.”

The FCA head pointed out that possessions are at around 1,000 a quarter, a historically low figure “as lenders show greater forbearance, but we have the highest number of accounts where arrears are greater than 10% of the balance.

“So, there are trade-offs here, people are being kept in their homes, but balances are accruing.”

Regulators have come under pressure to relax rules in a bid to boost UK growth following a Mansion House speech by Chancellor Rachel Reeves last November, where she said red tape on City firms had “gone too far” following the 2008 financial crisis.

Reeves added that she expected the Square Mile to play a key part in the government’s push for growth.