Mortgage Rule Review and the ‘shape of affordability’ – Burke

In December 2025, the FCA issued its review of the mortgage market as it looks to modernise practices and drive better outcomes.

The topics cover a wide range but are broadly split into four areas: expanding access to first-time buyers, enhancing later life lending, enabling innovation and protecting vulnerable consumers.

But a common theme in the paper is affordability, which is referenced in every chapter of the regulator’s document and is a vital part in delivering what I see as its key intentions.

The FCA is seeking to correct an overly cautious approach to the development and implementation of rules while recognising changing economic conditions at the global, local, and individual levels.

Through this, it is attempting to foster the creation of new products and payment schedules, opening up the market to under-served customers – whether that be first-time buyers, retirees, credit-impaired individuals or other vulnerable customers.

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Currently, most lenders use a combination of payslips, credit reference agency (CRA) data, and Office for National Statistics (ONS) data to assess income and expenditure and, therefore, affordability.

While this works well for the majority of borrowers, there are significant limitations when assessing vulnerable customers, those with variable income or customers with more complex circumstances.

For example, payslips can accurately verify income but are restricted to just the last three months, while CRA data is based on averages and is typically at least two months out of date due to reporting processes.

More importantly, even if these were all 100% accurate for an individual, they represent a point in time, and affordability is assessed against ‘monthly payments’ rather than assessing the ‘shape of affordability’.

Although the general economic outlook is better than it was heading into 2025, there are still significant macroeconomic risks and inflation remains stubbornly above target. Coupled with an increasing number of people on variable income (reliant on overtime, bonuses or on short-term contracts), the need to understand the ‘shape of affordability’ has never been greater.

Understanding the shape of affordability

As an illustration, the graph shows the shape of affordability for a first-time buyer on a £45,000 annual salary, looking to buy a property with another first-time buyer on a similar salary and continuing to split costs equally. When rent is considered, the first-time buyer can afford mortgage payments, including full non-discretionary and discretionary outgoings, and £300-per-month savings for 10 months of the year. If we introduced a circa £200 buffer, this means that in August and December, the first-time buyer would only be able to afford £600, but would be able to make up the £1,000 shortfall in April and comfortably overpay smaller amounts in the other seven months.

Whilst careful consideration is required to ensure that assessments are robust and will result in good outcomes for the consumer, the data and technology are readily available through open finance, and we are now developing approaches with different use cases.

Even if lenders take this approach to assessing affordability, most term loans do not offer the flexibility to make overpayments (without adjusting future payments) or underpayments without attracting arrears. This is despite the FCA specifying that it is possible under its and the Prudential Regulation Authority’s (PRA’s) existing rules, and some firms on the unsecured side have already done it.

The variable payments can be managed through open banking variable recurring payments (VRPs), and the use of artificial intelligence (AI) can provide a much more tailored experience for the customer.

The FCA makes a case for moving away from “the shadow of the financial crisis” that unduly restricted consumers from entering the market and for older consumers to unlock their property wealth. The Financial Policy Committee (FPC) has also recognised the abundance of caution by recommending that the PRA and FCA revise the 15% high loan-to-income (LTI) flow limit to be monitored at the aggregate industry level, rather than individual firm level, to allow specialist lenders to issue more high-LTI mortgages.

If the FCA and the industry are going to be successful in delivering more for under-served borrowers – through high-LTI loans, interest-only lending, later life or longer-term loans, variable repayment structures or for those that have been credit impaired – firms need to take a more sophisticated approach to assessing affordability.

They must not only consider an individual’s current circumstances but their future financial goals, income and expenditure, including any offsets from home improvements such as solar panels.

This type of approach opens up the opportunity for better ongoing customer relationships on a product that inspires little engagement until renewal time comes around. If you are using ongoing open banking data to assess the suitability of variable repayment structures, you may be able to identify vulnerability through changes to spend on healthcare services or mobility.

In addition, by understanding customers’ financial goals, you may be able to identify ways to save them money in areas like utilities or insurance while creating a new revenue stream for the firm.

Whilst this will be a considerable effort, especially for smaller firms, it is a fantastic opportunity to understand their customers on a completely new level. The data, technology and support are all available, and those firms that deliver this well will see great outcomes for their customers and shareholders.