The Financial Conduct Authority (FCA) published its Mortgage Rule Review consultation paper on supporting first-time buyers and under-served consumers, proposing to remove the requirement for a borrower to have a credible repayment strategy where the interest-only part of the mortgage is less than 25% of the valuation that the lender receives in the mortgage application.
It is proposing that where the interest-only amount is more than 50% of the valuation, the need to evidence enough equity to buy a cheaper property mortgage-free would apply.
Where the interest-only amount is between 25% and 50%, borrowers would not need to demonstrate enough potential equity to buy a cheaper home.
When a credible repayment strategy is needed, the lender must have evidence that the borrower has one. If this is not available, the lender should make a “reasonable assessment” to show the borrower has a clearly understood credible repayment strategy following interaction with the borrower.
The FCA said the sale of the main property was the most used credible repayment strategy, but lenders do not currently consider whether the sale would allow for the purchase of a cheaper home, so it was considering introducing this measure.
Are your clients ready for the first Making Tax Digital reporting deadline?
Sponsored by BM Solutions
The regulator is also proposing other forms of credible repayment strategies, including the use of a follow-on mortgage, such as retirement interest-only (RIO) and lifetime mortgages, and transitioning to a repayment mortgage within a reasonable period.
The requirement to carry out at least one review over the term of the interest-only mortgage will be maintained, and the FCA is proposing to add guidance on suitable trigger points for a review. This could be when it is requested by a borrower, when their product is coming to an end, or a change in circumstances, which means the repayment strategy is no longer suitable.
Unlocking options for borrowers
The FCA said that while a credible repayment strategy protected borrowers and lenders, it wanted lenders to consider more strategies.
It said current practices could be difficult for some borrowers, particularly first-time buyers, as they may not be able to provide evidence of a credible repayment plan.
Adding follow-on mortgages would allow more first-time buyers and under-served borrowers to be eligible for an interest-only or part interest-only mortgage that would “better reflect the realities of options” that borrowers may have.
This would also help borrowers who originally stated the sale of the main property as their repayment plan, but for whom the strategy is no longer appropriate.
It could also support older borrowers who do not want to move and believe a follow-on product is most suitable.
The FCA said removing some rules and guidance around interest-only and part interest-only mortgages could increase harm for some borrowers, but said the proposed changes were targeted and there was no intention of making these loans universally accessible.
It said the changes could support some people in renting the rental market sooner by meeting the affordability requirement for an interest-only loan over a repayment one.
The FCA said the proposed changes would be permissive.
