Moody’s Investor Services has said that the Financial Service Authority’s proposed changes to mortgage affordability are likely to reduce the supply of credit to the UK housing market which could compress lending volumes and margins.

The ratings agency also expects the measures to increase costs for lenders and to reduce the number of eligible borrowers and also the amount that they can borrow in the short term.

It says new loan applicants as well as existing non-standard mortgage holders may find it more difficult to access mortgage credit or to refinance their loans.

Moody’s report that although some existing borrowers will be unable to refinance under the more stringent tests, they see the lack of refinancing options introducing only relatively minor incremental credit risks, such as borrowers reverting to higher interest rates at the end of initial teaser or fixed rate periods.

However the agency says that the measures will ‘boost the credit quality of UK bank and building society mortgage portfolios in the long term, as applicants for new mortgages will have to undergo stricter underwriting checks’.