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The Financial Conduct Authority has published its anticipated discussion paper on the future of the mortgage market, after it received a letter from the government on Christmas Eve about ensuring regulators and regulations support growth.
The length of the discussion paper, at 72 pages, suggests there is a lot to discuss.
Published in June, it follows a now-closed consultation that launched in the previous month about proposals to make it easier, faster and cheaper for borrowers to make changes to their mortgage.
“Wide-ranging reviews of the mortgage market are rare,” says Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, “so this is potentially a once-in-a-generation opportunity.
“It is incumbent on us today to contribute to the design of an innovative, flexible and sustainable mortgage market that meets the needs of current and future generations.”
The regulator’s mortgage regime was introduced in 2004 and last reviewed in the wake of the 2008 financial crisis. The FCA says that with regulatory and industry reforms having raised standards around mortgage lending, there are far fewer borrowers in arrears.
However, it also acknowledges that the “more cautious” approach may have “unduly restricted” consumer access to the market.
And with analysis from the Department for Work and Pensions that two in five working-age people (38 per cent) are projected to be under-saving for retirement, the FCA adds that access to mortgages could be key to helping people achieve their financial goals in later life.
Potentially changing the stress test
Among the possible changes the regulator is seeking views on is the interest rate stress test, which has been a feature of mortgage regulation since 2014.
The test requires firms to consider the potential impact of likely future changes to interest rates, unless the rate is fixed for more than five years or until the end of contract. Firms must assume that rates will rise by at least 1 per cent over that time, even if they are projected to rise by less than that or decline.
The discussion paper is not the first time the FCA has considered the stress test rule. In March, it reminded firms about the “flexibility” the rule provides.
Lenders such as Santander and Accord Mortgages have since lowered their stress rates. According to the latter, borrowers can now take out 15 per cent or £37,000 more on average.
The stress test has strengths, the FCA says. But it is also concerned the test may be “unduly limiting the amount of borrowing that some otherwise creditworthy customers can access”.
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