Thousands of first-time buyers could be helped onto the property ladder by reforms to building societies backed by the House of Commons.

The Building Societies Act 1986 (Amendment) Bill aims to modernise societies by expanding their lending capacity.

The proposed law change, moved by Labour’s Julie Elliott, follows a Government consultation that considered how to allow building societies to “compete on a more level playing field with banks” and to promote competition within the financial services sector.

Ms Elliott’s Government-backed Bill received an unopposed second reading in the Commons and will undergo further scrutiny by MPs and in the House of Lords.

The MP for Sunderland Central told the Commons: “Although this Bill doesn’t solve all the issues in the broken housing market today, it could free up more availability of money to lend in mortgages.

“And as building societies lend more in percentage terms to first-time buyers, then it should enable more first-time buyers to get on the housing ladder.”

She added: “Modernisation of building society legislation is long overdue, there are some archaic requirements around the way they fund themselves that puts them at a competitive disadvantage when compared to banks.

“Competition in banking is good for consumers and given building societies drive innovation, particularly in supporting first-time buyers, strengthening the sector is a great route to supporting aspiration across the UK.”

She continued: “Prudent lending is crucial to the UK’s economic growth. Making this change will make building societies safe, more secure, and competitive in the long term, without affecting their status as mutuals.”

Conservative former minister George Freeman said: “This is a really important Bill for updating the law, giving building societies a chance to get back to where they were in the early 90s – they were responsible for something like 60% of the market, that’s dropped down to 20%.”

He added: “Increasing lending capacity is in itself a huge step forward, I think the figure is £10 billion of extra lending capacity will allow the provision of another 20,000 mortgages, and particularly for first-time buyers that is hugely important.”

Labour’s shadow Treasury minister Tulip Siddiq said: “Since 2020 building societies have supported 360,000 first-time buyers, that’s over £63 billion provided to help people buy their first homes, that’s why this Bill is so important.

“It will empower societies across the UK to raise more funds and help our vulnerable constituents.”

Treasury minister Nigel Huddleston said the Bill has the “whole-hearted” support of the Government.

He added: “The Government sees this Private Member’s Bill as a great way to support building societies, ensuring that they can compete with retail banks on a more level playing field, while continuing to provide essential competition to the UK financial services sector.”