Proposals that could make it easier for people such as first-time buyers, older borrowers and people with fluctuating incomes, such as self-employed people, to access a mortgage have been set out by the City regulator.
The Financial Conduct Authority (FCA) said it believes that some creditworthy people may be currently underserved by the market and it wants to update rules to keep pace with the way people live their lives now.
The regulator wants to help people achieve the aim of homeownership through changes that could widen access to interest-only and part interest-only lending and make it easier for borrowers to raise mortgage finance in later life.
It is also aiming to encourage lenders to take a more individualised approach when assessing the creditworthiness of customers.
With interest-only mortgages, borrowers only need to pay the interest on the loan during the term of the deal, with the original amount borrowed eventually repaid at the end.
Delaying the repayment of capital can help borrowers to keep their monthly payments down, or access homeownership earlier.
But in the past, interest-only loans have been controversial due to some people not having the means to pay the original mortgage loan back.
The FCA consultation document said that before the financial crisis in 2008, interest-only lending was used to reduce monthly mortgage payments but underwriting and sales standards were “poor”.
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In 2014, stricter affordability requirements were introduced as part of the Mortgage Market Review, which included the need for lenders to ensure there was a credible repayment strategy to repay the capital at maturity.
Some people have part interest-only mortgages and part repayment mortgages.
Among the FCA’s new proposals, where the interest-only part of the mortgage is less than 25% of the valuation the lender receives as part of the mortgage application, the FCA is proposing to remove its requirement for the borrower to have a credible repayment strategy.
The consultation document said: “We believe that interest-only and part interest-only/part repayment lending could support some FTBs (first-time buyers) in getting on the property ladder, however the changes we are proposing are targeted, and would not make interest-only mortgages universally accessible.”
The document also said that the risk of adverse consequences for some consumers when using such products had been “carefully considered” and that “we have also considered the risks associated with renting for longer if consumers are unable to buy their own home”.
The proposals would also make it easier for older homeowners to unlock wealth built up in their property.
The regulator also said that adding follow-on mortgage products, such as a retirement interest-only mortgage or a regulated lifetime mortgage as examples of a credible repayment strategy could allow more underserved customers to access interest-only and part interest-only and part repayment mortgages “in a safe way”.
It said this would also “better reflect the realities of options a consumer may have as they come closer to the end of their interest-only mortgage term”.
The consultation document said that, with 43% of working age people projected to be under-saving for their retirement, better access to the housing wealth that people have built up could be key to helping people achieve their financial goals in later life.
The regulator is also proposing to remove guidance which would mean affordability for joint retirement interest-only mortgage applications are assessed in the same way as for standard joint mortgages – in that firms would not be obliged to always consider a sole borrower’s ability to afford the mortgage if the other borrower dies.
Firms would still be able to consider any future income the surviving party will receive, such as spousal pension.
The consultation document said: “We know from our product sales data that arrears in retirement interest-only mortgages are extremely low, with less than 1% being in arrears.”
The FCA also said it wants to reduce barriers for lenders to offer flexible repayments for people with variable income, such as the self-employed, and lend to those paid in foreign currency.
It also wants lenders to assess affordability based on a person’s full and current situation, rather than automatically excluding people because of minor or past credit history issues.
The consultation document said: “Life events (for example temporary job loss) can drive credit impairment, and consumers may recover faster than some policies reflect.
“Reliance on historic indicators may not fully reflect current circumstances.”
David Geale, executive director for payments and digital finance at the FCA, 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 for those that may be underserved.”
The FCA oversees the Consumer Duty, which requires financial firms to put customers at the heart of what they do, including when designing products and communicating with customers.
The regulator said its proposals build on the duty – keeping appropriate safeguards in place, including supporting people in understanding their options.
As part of gathering feedback on the proposals, the FCA is using an online tool to hear directly from people about their experiences of the mortgage market, while also considering feedback from firms and others.
The FCA wants to hear responses to its consultation by July 28.
Sarah Coles, head of personal finance at AJ Bell, said: “Developing products to better suit people’s lives makes perfect sense.”
She added: “But mortgages are just one part of the picture.
“A healthy housing market also needs enough affordable properties, plus tax rules that don’t distort buyer behaviour and put people off.
“The flow of first-time buyers also depends on people being able to build healthy deposits.
“This can be a huge challenge when they’re also having to cover the cost of sky-high rents.”
Karina Hutchins, director of mortgages at UK Finance, said: “UK Finance welcomes the proposed changes to the mortgage rules.
“These proposals update existing guidance and give lenders greater flexibility to support customers’ evolving needs.
“They also support the Government’s pro-growth agenda by removing barriers to finance and helping more prospective home buyers on to the property ladder.”
Matt Smith, a mortgage expert at Rightmove, described the proposals as “positive”, adding: “Their impact will depend on how simple they are for lenders and brokers to implement in practice.”
David Fell, lead analyst at Hamptons, said some aspiring buyers, particularly those with non-standard employment terms, have been kept renting “for much longer”.
