Earlier today, the regulator came out with its next steps for the Mortgage Rule Review, with later life lending, innovation and vulnerable customers being other market sectors that were under the microscope.
Other areas specifically that will be explored for further changes to support first-time buyers are variable and irregular income or assets, the credit impaired, regulated bridging loans and the recognition of rental payments.
The regulator added that it was not proposing further changes in relation to shared ownership, interest rate stress testing or long-term fixed rates.
The report said there was a “wide agreement that some potential FTB groups could be better served”.
“This includes those who cannot raise a large deposit, do not have family support, are self‑employed, have irregular or contract‑based income, are recovering from a negative life event, have overseas assets and income, or have dealt with a credit impairment. Responses also highlighted those living in tied accommodation, PhD students, carers, long‑term renters and older borrowers as groups who may be under-served.
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“There was consensus that change could improve access for a wider range of consumers. Some suggestions would require regulatory change. Others could be delivered within the current framework; for example, integration of new alternate data, using rental payment history, or using a wider variety of income,” it said.
Further LTI review expected
The FCA said respondents had “emphasised the need for proportionate reform” and highlighted the “importance of market stability”, as well as “supporting wider homeownership” regarding LTI reform.
The regulator said that it, along with the Prudential Regulation Authority (PRA), was reviewing its LTI ratio requirements, with a consultation paper due in the first quarter of next year.
This comes after the Financial Policy Committee’s (FPC’s) recommendation in July that individual lenders should be able to increase their share of lending at LTI ratios of 4.5 times or higher as long as the 15% limit is kept.
Multiple interest-only proposals to be explored
Looking at interest-only, the FCA said its current framework was “clear” but was “observed to limit otherwise affordable, suitable and viable interest-only lending”, which could support “wider and/or earlier access to homeownership”.
It said it was looking at “proposals to update its interest-only requirements”. This could include reviewing and widening credible repayment strategies and including the option to consider “follow-on” or later life mortgages.
Another avenue includes part interest-only, which could help some first-time buyers and other consumers get on the housing ladder but is currently evaluated using the same framework as pure interest-only.
The FCA said it would consider proposing a “differentiated affordability approach for certain part interest‑only lending”.
Low Start Mortgages were also mentioned, which have lower monthly periods for an initial period. These would start as pure interest-only and convert to repayment after a set period and are “particularly suitable for customers with high expected salary growth”.
“While Low Start Mortgages are not prohibited under our current framework, the affordability of the increased payments would need to be assessed at the outset. We will consider whether to propose targeted changes to affordability requirements to treat the conversion to a repayment mortgage differently. We will also consider updates to the treatment of potential future increases to income,” it said.
Certain ‘monthly payment’ references in MCOB to be examined
On variable and irregular income or assets, the FCA said its current requirements “were not perceived to create barriers to innovation” to support different employment or income types.
However, lender risk appetite and capital requirements were cited by some respondents as barriers to innovation.
Respondents called for greater payment flexibility, such as alternative payment schedules.
The FCA said it would look at its references to monthly payments within MCOB rules and whether updates were necessary to “enable product innovation to support variable payment schedules”.
Simplification of foreign currency requirements on cards
The FCA said it would explore whether it can simplify foreign currency requirements, in line with Consumer Duty, to “support customers with foreign income or assets”.
Respondents said the regulator’s foreign currency requirements are “disproportionate and operationally complex, particularly those tracking and notifying borrowers of currency fluctuations”. They also highlighted the right to convert the loan to an alternate currency under certain conditions as a potential problem.
This has led to many lenders not offering these loans, and since 2016, some lenders have applied greater reductions to foreign income before calculating mortgage affordability to “account for currency risk”.
Credit-impaired customer definition to be reviewed
Credit-impaired customers still “often face barriers when seeking a mortgage, even where their financial situation has improved or the underlying cause resolved”, the FCA said.
Respondents said the definition of a credit-impaired borrower should be reviewed, as it “may be arbitrary, overly restrictive and potentially exclude individuals from mortgages who have since demonstrated financial resilience”.
“The credit impaired definition, which was originally for reporting purposes only, was introduced as an operative term as part of the Mortgage Market Review (MMR). Its purpose is to support firms to apply our debt consolidation requirements, by creating consistency across firms and prevent gaming (i.e., manipulating applications to avoid stricter debt consolidation rules).
“Based on the feedback we received, firms may be applying the definition more broadly than originally intended, constraining lending to some borrowers whose adverse credit has been resolved.
“We will explore how the definition is impacting firms’ lending appetite and review our glossary definition to ensure how it should be applied is clear and outcome‑focused. We will also consider the consequential impacts of any change on regulatory reporting,” the FCA said.
Bridging term limits and extension requirements will be examined
The FCA said it wanted “regulated bridging loans” to work for “consumers and lenders where there is a genuine need for bridging finance”.
The regulator said the MMR in 2013 “identified that some vulnerable consumers were being targeted to use bridging finance to clear arrears when facing repossession, despite having no realistic prospect of being able to refinance to pay off the bridging loan”.
It added that the MMR had also “identified some vulnerable consumers [who] were targeted to use bridging finance to repair their credit files”.
“We will explore options to update the term limit and extension requirements for regulated bridging loans. We will further evaluate the difficulties caused by the current term limit, and the potential harm that could be caused by more flexible term extension options and a longer defined term limit,” the FCA said.
The regulator said it continued to consider that a “term limit, evidence of a clearly understood and credible repayment strategy, and the requirement that the loan cannot be used to repair credit are necessary consumer protections in this market”.
FCA supports adoption of rental data in affordability but draws line at landlords and letting agents reporting to CRAs
On the inclusion of rental payment history in affordability standards, the FCA said it “will support further industry and market‑led innovation and adoption of rental payment data in firms’ affordability assessments”.
It explained: “The UK market, alongside the US, is developing some of the most advanced approaches globally to integrating rental payment data to positively build customer credit profiles. There are several active third‑party service providers, including credit reference agencies (CRAs) and payment institutions, using direct consumer reporting and open banking sources to integrate rental payment history.
“Most recently, a CRA has announced updates to its approach to using rental payments in its credit assessment score. This step could make it easier for lenders to take positive rental history into consideration when assessing affordability.”
The regulator added that there were “established mortgage products” in the UK that “explicitly use rental payment history as a factor in their underwriting”.
“Despite these developments, several trade bodies and several firms suggested further ways to improve the consistency and quality of rental payment reporting. This included further data standardisation, and potentially mandating landlords and letting agencies to report rent payments to CRAs.
“This latter point would introduce new duties on non‑regulated entities and would require legislative change. It is likely to incur new costs to landlords, and to our knowledge, no other jurisdiction has yet taken this step. At this stage, we do not see value in establishing such requirements. We have passed this feedback to the Treasury,” it said.
