The Financial Conduct Authority’s 72-page mortgage review is the “wide-ranging” look at opening up the sector the regulator promised at the start of the year.
Its Mortgage Rule Review: the future of the mortgage market, includes options on scrapping five-year mortgages, cutting the 1% minimum stress test margin and widening the use of later life lending.
Below are its key proposals at a glance:
Scrapping five-year mortgages
The watchdog says: “The current rule creates a cliff-edge at 61 months. This may not be a problem in itself, as any length of time would mean a hard cut‑off, but we want to ensure that five years is the most appropriate period.”
It adds: “Before 2023, fixes of fewer than five years had a higher average loan-to-income ratio, likely due to the lower average monthly payments.
“However, now that expected rates are less stable, the stress test may be pushing borrowers towards longer-term fixes.”
Creating a central stress rate
A central stress rate set by the FCA would be a minimum interest rate at which lenders must assess affordability.
The body says: “Firms would be unable to ‘game’ it, and it could reduce the regulatory burden, particularly on new entrants and smaller lenders.
But the regulator adds that lenders would “lose the flexibility to adapt their test to different product types” and also might hit “lower-risk borrowers, who might expect to pay lower interest rates”.
Rents and stress tests
The watchdog says its current rules allow past rental payments as an indicator of affordability.
But it adds: “We could go further by allowing past payment of rent alone to prove affordability.
“This would simply compare a customer’s prospective mortgage with their rental payment track record.”
First-time buyers
The regulator’s proposals for FTBS are laced throughout its consultation.
But at the outset, it points out that deposits are a key problem.
It says: “Compared to 2006, the median deposit paid by first-time buyers has almost tripled from just over £13,600 to £37,400.
And points out: “The average age of first-time buyers has also increased from 31 to 34 since 2004.
It says: “We want to explore opportunities to increase lending to first-time borrowers based on their expected career trajectories.”
And warns: “If greater access to mortgages did increase demand, this would likely increase the price of typical first-time buyer residential properties in the short term.”
Hard line on the loan‑to‑income flow limit
Nationwide, Skipton Building Society and UK Finance are among a number of lenders and bodies who have called for this limit to be raised.
Currently, the Bank of England’s Financial Policy Committee (which the FCA is a member), rules say that new residential mortgage loans are capped at, or greater than, 4.5 times salary to no more than 15% of total home loans a year.
Lenders argue this should be raised to 20%.
But the FCA says: “The FPC’s LTI flow limit is in place to guard against a material and unsustainable increase in household indebtedness and in the share of highly indebted households.”
It adds: “The aggregate share of lending at income multiples of more than 4.5 was at 7.8% in the fourth quarter of 2024.
“In 2024, the FPC concluded that the LTI has not significantly reduced mortgage access for first-time buyers.”
Changing the 1% minimum stress test margin
The watchdog says that lenders have told it that “total lending could be increased by around 0.5% if the minimum margin were reduced by 25 basis points, or 1% if it were reduced by 50 basis points, with some lenders suggesting the impact could be even higher at up to 5%.
It adds: “We could consider varying the minimum margin depending on prevailing economic conditions.”
Later life lending
The regulator says: “There is around £9tn in UK housing stock, and some of this could support a more comfortable retirement.”
It looks at four key questions around the equity release market:
Should more borrowers look to the later life lending sector to access housing wealth and support their retirement?
How can our rules support product innovation in later life lending?
Should it be easier to access products like RIOs and lifetime mortgages? What is holding back demand for these products?
How effective and holistic is advice on later life lending? How can our rules support borrowers to access more effective information or advice to support their needs?
Interest-only mortgages
The regulator points out: “Interest-only mortgages made up a significant portion of regulated mortgage sales before the financial crisis (39% in 2007 compared to 4.5% in 2024).
“Some of these mortgages were taken out by customers without a plan for repaying the capital, meaning borrowers were at risk of failing to repay the loan at maturity.
It asks: “We would like views on whether our rules could better support more interest-only mortgages.
“In particular, if we should further support part interest-only and part capital repayment mortgages (part and part) and the potential benefits of doing so.”
Shared ownership
The watchdog points out that 17,507 homes were sold under these schemes in 2022/23 with 77% going to FTBs, adding that building societies handled 58.6% of these sales last year.
It asks the market to “identify potential barriers, if any, to shared ownership lending that regulatory intervention could help address.”
Bridging Loans
The watchdog says: “We want to explore how revising our rules could potentially support wider economic growth.
“Enabling homeowners to access more finance to improve their homes or self-build could contribute to economic growth through building and construction works.”
It says: “We could adjust the term limit on bridging loans. However, this would also increase the total amount of their borrowing through more interest accruing on the loan.”
The watchdog adds: “We could introduce more flexibility into our rules to recognise self-build, development and refurbishments as standalone loans eligible for interest roll-up mortgages.”
Consultation on this paper closes on 19 September.
