The Financial Conduct Authority (FCA) has proposed new rules that could make it easier for first-time buyers, older borrowers, and self-employed individuals to secure mortgages. The regulator believes that some creditworthy people are currently underserved by the market and wants to update regulations to reflect modern lifestyles.
Key Proposals
The FCA aims to widen access to interest-only and part interest-only lending, making homeownership more achievable. It also encourages lenders to adopt a more individualised approach to assessing creditworthiness. Under current rules, interest-only mortgages require borrowers to have a credible repayment strategy for the capital. The FCA proposes removing this requirement when the interest-only portion is less than 25% of the property valuation.
Interest-Only Mortgages
Interest-only mortgages allow borrowers to pay only the interest during the loan term, repaying the original amount at the end. This can lower monthly payments or help buyers enter the market earlier. However, past controversies arose when borrowers lacked repayment means. Stricter rules were introduced in 2014 under the Mortgage Market Review, requiring credible repayment strategies.
The FCA consultation notes that pre-2008 interest-only lending had poor underwriting standards. The new proposals are targeted and would not make interest-only mortgages universally accessible. The risk of adverse consequences for consumers has been carefully considered, alongside the risks of prolonged renting.
Support for Older Borrowers
The proposals also aim to help older homeowners unlock property wealth. Adding follow-on products like retirement interest-only mortgages or regulated lifetime mortgages as credible repayment strategies could allow more underserved customers to access these loans safely. With 43% of working-age people projected to under-save for retirement, better access to housing wealth could support financial goals in later life.
The FCA proposes removing guidance that requires joint retirement interest-only mortgage applications to assess affordability as for standard joint mortgages. Firms would not be obliged to always consider a sole borrower's ability if the other dies, though they may consider future income like spousal pensions. Arrears in retirement interest-only mortgages are extremely low, under 1%.
Flexible Repayments and Credit Assessment
The FCA wants to reduce barriers for lenders to offer flexible repayments for people with variable incomes, such as the self-employed, and lend to those paid in foreign currency. It also wants lenders to assess affordability based on current situations rather than automatically excluding people due to minor or past credit issues. Life events like temporary job loss can cause credit impairment, and consumers may recover faster than policies reflect.
David Geale, FCA executive director for payments and digital finance, said: 'We're living longer and how many people work has changed. Our mortgage rules need to keep pace so those who can afford to repay can borrow. Stronger protections mean we can now safely widen access to mortgage borrowing.'
Consumer Duty and Feedback
The proposals build on the Consumer Duty, requiring firms to put customers at the heart of their operations. The FCA is using an online tool to gather public feedback, alongside input from firms and others. Responses are due by July 28.
Sarah Coles, head of personal finance at AJ Bell, said: 'Developing products to better suit people's lives makes perfect sense. But a healthy housing market also needs enough affordable properties and tax rules that don't distort behaviour. First-time buyers also need to build healthy deposits, which is a huge challenge with sky-high rents.'
Karina Hutchins, director of mortgages at UK Finance, welcomed the changes, saying they 'give lenders greater flexibility to support customers' evolving needs and support the Government's pro-growth agenda.' Matt Smith, mortgage expert at Rightmove, called the proposals 'positive,' noting their impact depends on implementation simplicity. David Fell, lead analyst at Hamptons, said some aspiring buyers with non-standard employment have been kept renting 'for much longer.'
