The Financial Conduct Authority’s 72-page mortgage evaluate is the “wide-ranging” have a look at opening up the sector the regulator promised at first of the 12 months.
Its Mortgage Rule Review: the long run of the mortgage market, consists of choices on scrapping five-year mortgages, slicing the 1% minimal stress take a look at margin and widening the use of later life lending.
Below are its key proposals at a look:
Scrapping five-year mortgages
The watchdog says: “The present rule creates a cliff-edge at 61 months. This might not be an issue in itself, as any size of time would imply a tough reduce‑off, however we need to be sure that 5 years is essentially the most applicable interval.”
It provides: “Before 2023, fixes of fewer than 5 years had a better common loan-to-income ratio, doubtless on account of the decrease common month-to-month funds.
“However, now that anticipated charges are much less secure, the stress take a look at could also be pushing debtors in the direction of longer-term fixes.”
Creating a central stress price
A central stress price set by the FCA can be a minimal rate of interest at which lenders should assess affordability.
The physique says: “Firms can be unable to ‘recreation’ it, and it may scale back the regulatory burden, notably on new entrants and smaller lenders.
But the regulator provides that lenders would “lose the flexibleness to adapt their take a look at to totally different product sorts” and in addition may hit “lower-risk debtors, who may count on to pay decrease rates of interest”.
Rents and stress assessments
The watchdog says its present guidelines permit previous rental funds as an indicator of affordability.
But it provides: “We may go additional by permitting previous fee of lease alone to show affordability.
“This would merely evaluate a buyer’s potential mortgage with their rental fee observe report.”
First-time patrons
The regulator’s proposals for FTBS are laced all through its session.
But on the outset, it factors out that deposits are a key downside.
It says: “Compared to 2006, the median deposit paid by first-time patrons has virtually tripled from simply over £13,600 to £37,400.
And factors out: “The common age of first-time patrons has additionally elevated from 31 to 34 since 2004.
It says: “We need to discover alternatives to extend lending to first-time debtors primarily based on their anticipated profession trajectories.”
And warns: “If larger entry to mortgages did enhance demand, this could doubtless enhance the worth of typical first-time purchaser residential properties within the brief time period.”
Hard line on the mortgage‑to‑earnings movement restrict
Nationwide, Skipton Building Society and UK Finance are amongst a quantity of lenders and our bodies who’ve known as for this restrict to be raised.
Currently, the Bank of England’s Financial Policy Committee (which the FCA is a member), guidelines say that new residential mortgage loans are capped at, or larger than, 4.5 instances wage to not more than 15% of complete residence loans a 12 months.
Lenders argue this ought to be raised to twenty%.
But the FCA says: “The FPC’s LTI movement restrict is in place to protect in opposition to a cloth and unsustainable enhance in family indebtedness and within the share of extremely indebted households.”
It provides: “The combination share of lending at earnings multiples of greater than 4.5 was at 7.8% within the fourth quarter of 2024.
“In 2024, the FPC concluded that the LTI has not considerably diminished mortgage entry for first-time patrons.”
Changing the 1% minimal stress take a look at margin
The watchdog says that lenders have informed it that “complete lending could possibly be elevated by round 0.5% if the minimal margin have been diminished by 25 foundation factors, or 1% if it have been diminished by 50 foundation factors, with some lenders suggesting the affect could possibly be even larger at as much as 5%.
It provides: “We may contemplate various the minimal margin relying on prevailing financial situations.”
Later life lending
The regulator says: “There is round £9tn in UK housing inventory, and a few of this might help a extra snug retirement.”
It seems to be at 4 key questions across the fairness launch market:
Should extra debtors look to the later life lending sector to entry housing wealth and help their retirement?
How can our guidelines help product innovation in later life lending?
Should or not it’s simpler to entry merchandise like RIOs and lifelong mortgages? What is holding again demand for these merchandise?
How efficient and holistic is recommendation on later life lending? How can our guidelines help debtors to entry more practical data or recommendation to help their wants?
Interest-only mortgages
The regulator factors out: “Interest-only mortgages made up a good portion of regulated mortgage gross sales earlier than the monetary disaster (39% in 2007 in comparison with 4.5% in 2024).
“Some of these mortgages have been taken out by prospects with no plan for repaying the capital, which means debtors have been in danger of failing to repay the mortgage at maturity.
It asks: “We would love views on whether or not our guidelines may higher help extra interest-only mortgages.
“In explicit, if we should always additional help half interest-only and half capital reimbursement mortgages (half and half) and the potential advantages of doing so.”
Shared possession
The watchdog factors out that 17,507 properties have been bought underneath these schemes in 2022/23 with 77% going to FTBs, including that constructing societies dealt with 58.6% of these gross sales final 12 months.
It asks the market to “establish potential obstacles, if any, to shared possession lending that regulatory intervention may assist handle.”
Bridging Loans
The watchdog says: “We need to discover how revising our guidelines may probably help wider financial progress.
“Enabling householders to entry extra finance to enhance their properties or self-build may contribute to financial progress via constructing and building works.”
It says: “We may regulate the time period restrict on bridging loans. However, this could additionally enhance the entire quantity of their borrowing via extra curiosity accruing on the mortgage.”
The watchdog provides: “We may introduce extra flexibility into our guidelines to recognise self-build, growth and refurbishments as standalone loans eligible for curiosity roll-up mortgages.”
Consultation on this paper closes on 19 September.
