Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Solutions. Read the original article for full details.

FCA Proposes Easing Interest-Only Mortgage Repayment Strategy Rules

The Financial Conduct Authority (FCA) has proposed changes to the requirements for borrowers to demonstrate a repayment strategy when taking out interest-only or part interest-only mortgages. The proposals are part of the FCA's Mortgage Rule Review consultation paper, which aims to support first-time buyers and under-served consumers.

Under the proposed changes, borrowers would not need to have a credible repayment strategy if the interest-only portion of their mortgage is less than 25% of the property valuation provided in the mortgage application. For loans where the interest-only amount is more than 50% of the valuation, borrowers would need to show enough equity to purchase a cheaper property mortgage-free. If the interest-only amount is between 25% and 50%, borrowers would not need to demonstrate sufficient equity to buy a cheaper home.

When a credible repayment strategy is required, lenders must have evidence of it. If such evidence is not available, lenders should make a reasonable assessment to ensure the borrower has a clearly understood and credible repayment strategy after interacting with them. The FCA noted that selling the main property is currently the most common repayment strategy, but lenders do not always consider whether this would allow the borrower to buy a cheaper home. The FCA is considering introducing this measure.

The FCA is also proposing to recognise other forms of credible repayment strategies, such as follow-on mortgages (including retirement interest-only and lifetime mortgages) and transitioning to a repayment mortgage within a reasonable period. The requirement for at least one review during the term of the interest-only mortgage will remain, with proposed guidance on suitable trigger points for a review, such as when requested by the borrower, at the end of a product term, or if the repayment strategy becomes unsuitable due to a change in circumstances.

The FCA stated that these changes could help first-time buyers and under-served borrowers who may struggle to provide evidence of a credible repayment plan. The proposals could also support older borrowers who prefer not to move and believe a follow-on product is more suitable. The FCA acknowledged that removing some rules could increase harm for some borrowers, but emphasised that the changes are targeted and not intended to make interest-only loans universally accessible. The FCA also noted that the changes could help some people enter the rental market sooner by meeting affordability requirements for an interest-only loan.