FCA consults on targeted mortgage rule reforms to support first-time buyers and underserved consumers

The FCA proposes removing the requirement to demonstrate a credible repayment strategy where the interest-only element is below 25% of the lender's valuation and introducing tiered thresholds that determine when enhanced evidential requirements apply, including retaining existing sale-of-property expectations (i.e. that there would be enough equity on sale to allow the borrower to purchase a cheaper property) where the interest-only element exceeds 50%.  Where evidence of a repayment strategy is not reasonably available, firms would be permitted to use a "tailored interactive dialogue" to assess whether a borrower has a clearly understood plan, with a record-keeping obligation on that dialogue, albeit that the evidential requirements appear to be down to the lender to decide and this idea is to be treated with caution. The inclusion of follow-on mortgage products (such as RIO, lifetime mortgages or conversion to a repayment mortgage) adds further flexibility to interest-only products.  However, the threshold tests on repayment strategy assessment appear to temper the idea that products for first time buyers which start as interest-only and then convert to repayment can be offered en masse.

Lenders would continue to be required to carry out at least one review during the mortgage term to check that a repayment strategy remains in place and appears reasonable, with timing designed to give customers sufficient opportunity to remedy any shortfall.  The FCA proposes adding non-exhaustive guidance on the types of events that should prompt a review, for example, a customer request, the end of a current product deal, a material change in circumstances, or falling house prices. If more innovative products (such as interest-only converting to repayment) are to be used, then clearly a reassessment would be required at the point of conversion.

The FCA proposes removing guidance that, on joint RIO applications, firms should always consider whether a single borrower could meet payments if the other borrower dies, meaning joint RIO affordability would instead be assessed in the same way as standard joint mortgages, with each firm's approach determined by its risk appetite and Consumer Duty obligations.  The FCA notes that RIO arrears rates are extremely low (less than 1%), and that firms remain fully expected to avoid foreseeable harm under the Consumer Duty, including for vulnerable customers.

The FCA proposes updating Handbook references from "monthly payments" to "regular contractual payments" and explicitly confirming that firms may agree non-monthly payment schedules, including quarterly or other frequencies, assessing repayment ability by reference to the contractual schedule agreed, including when dealing with payment shortfalls and capitalisation.  The proposals would also expand guidance with practical examples of acceptable evidence for assessing affordability for borrowers with variable or irregular income, while making clear that firms must explain the financial implications of different schedules (such as higher total interest on quarterly arrangements) in line with existing disclosure requirements and the Consumer Duty.

The FCA has observed that some firms may be applying the Handbook glossary definition of a "credit-impaired customer" beyond its intended purpose, which relates to specific debt consolidation affordability steps and regulatory reporting, in a way that effectively bars recovered borrowers who may now be entirely creditworthy.  The FCA proposes clarifying that the definition applies only to specified MCOB and SUP provisions and adding guidance that firms must not treat it as a factual indicator of unaffordability, with any group-level outcomes being evidence-based and consistent with the Consumer Duty. There also appears to be some indication that the FCA is willing to accept a more tailored, weighted approach to customer who have historic credit impairment or who have recently recovered from poor credit, such as attributing lower weight to historic events and/or to lower level unsecured arrears.

The FCA proposes differentiating between non-sterling denominated mortgages on the one hand and sterling mortgages supported by foreign currency income on the other, concentrating targeted consumer protections on the situations where exchange-rate risk is greatest.  For non-sterling denominated loans, firms could be able to stop offering conversion rights on new contracts and remove the fixed 20% FX movement trigger, instead making a judgment as to when movements are "significant" having regard to the Consumer Duty; for sterling loans supported by foreign currency income, firms could equally remove conversion rights and cease providing mandatory exchange-rate movement warnings. This will have a knock-on effect on ESIS requirements as well as to financial promotions and to in-life customer communications.

The FCA proposes extending the Handbook definition of a regulated bridging loan to cover terms of up to 24 months, compared with the current 12-month maximum.  It also proposes capping the combined original and extended term at 24 months and removing the requirement to reassess affordability (as if a new loan were being made) when a bridging loan that is not an interest roll-up mortgage is extended, thereby reducing unnecessary process friction for customers with legitimate needs.