The Financial Conduct Authority’s 72-page mortgage overview is the “wide-ranging” have a look at opening up the sector the regulator promised firstly of the yr.
Its Mortgage Rule Review: the way forward for the mortgage market, consists of choices on scrapping five-year mortgages, slicing the 1% minimal stress check margin and widening the usage 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 is probably not a downside in itself, as any size of time would imply a laborious lower‑off, however we wish to make sure that 5 years is probably the most applicable interval.”
It provides: “Before 2023, fixes of fewer than 5 years had a increased common loan-to-income ratio, seemingly resulting from the decrease common month-to-month funds.
“However, now that anticipated charges are much less secure, the stress check could also be pushing debtors in the direction of longer-term fixes.”
Creating a central stress charge
A central stress charge set by the FCA could be a minimal rate of interest at which lenders should assess affordability.
The physique says: “Firms could be unable to ‘sport’ it, and it may cut back the regulatory burden, significantly on new entrants and smaller lenders.
But the regulator provides that lenders would “lose the flexibleness to adapt their check to completely different product varieties” and in addition would possibly hit “lower-risk debtors, who would possibly anticipate to pay decrease rates of interest”.
Rents and stress checks
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 cost of hire alone to show affordability.
“This would merely examine a buyer’s potential mortgage with their rental cost monitor document.”
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 consumers has nearly tripled from simply over £13,600 to £37,400.
And factors out: “The common age of first-time consumers has additionally elevated from 31 to 34 since 2004.
It says: “We wish to discover alternatives to extend lending to first-time debtors based mostly on their anticipated profession trajectories.”
And warns: “If better entry to mortgages did enhance demand, this may seemingly enhance the value of typical first-time purchaser residential properties within the brief time period.”
Hard line on the mortgage‑to‑revenue stream restrict
Nationwide, Skipton Building Society and UK Finance are amongst a variety of lenders and our bodies who’ve referred to 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 better than, 4.5 instances wage to not more than 15% of whole residence loans a yr.
Lenders argue this must be raised to twenty%.
But the FCA says: “The FPC’s LTI stream restrict is in place to protect in opposition to a materials and unsustainable enhance in family indebtedness and within the share of extremely indebted households.”
It provides: “The combination share of lending at revenue 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 lowered mortgage entry for first-time consumers.”
Changing the 1% minimal stress check margin
The watchdog says that lenders have advised it that “whole lending might be elevated by round 0.5% if the minimal margin had been lowered by 25 foundation factors, or 1% if it had been lowered by 50 foundation factors, with some lenders suggesting the affect might be even increased at as much as 5%.
It provides: “We may contemplate various the minimal margin relying on prevailing financial situations.”
The regulator says: “There is round £9tn in UK housing inventory, and a few of this might assist 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 assist their retirement?
How can our guidelines assist product innovation in later life lending?
Should 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 assist debtors to entry more practical info or recommendation to assist 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 those mortgages had been taken out by prospects with out a plan for repaying the capital, that means debtors had been susceptible to failing to repay the mortgage at maturity.
It asks: “We would really like views on whether or not our guidelines may higher assist extra interest-only mortgages.
“In specific, if we should always additional assist half interest-only and half capital reimbursement mortgages (half and half) and the potential advantages of doing so.”
The watchdog factors out that 17,507 properties had been bought underneath these schemes in 2022/23 with 77% going to FTBs, including that constructing societies dealt with 58.6% of those gross sales final yr.
It asks the market to “establish potential obstacles, if any, to shared possession lending that regulatory intervention may assist deal with.”
The watchdog says: “We wish to discover how revising our guidelines may probably assist wider financial development.
“Enabling owners to entry extra finance to enhance their properties or self-build may contribute to financial development by means of constructing and development works.”
It says: “We may modify the time period restrict on bridging loans. However, this may additionally enhance the full quantity of their borrowing by means of extra curiosity accruing on the mortgage.”
The watchdog provides: “We may introduce extra flexibility into our guidelines to recognise self-build, improvement and refurbishments as standalone loans eligible for curiosity roll-up mortgages.”
Consultation on this paper closes on 19 September.
