New mortgage rules have been proposed by the Financial Conduct Authority (FCA) to give lenders more flexibility when evaluating borrowers’ circumstances. Many potential homeowners can afford monthly mortgage payments but their non-standard circumstances make it challenging to secure the mortgage they need.
The FCA wants to address how some of these potential barriers are handled. Specifically, they are looking to review how affordability is assessed for those with a variable income or income paid in a foreign currency, how historic credit issues are handled and the options available to older or retired borrowers.
These suggested FCA mortgage rule changes will then make it much easier for self-employed borrowers, first-time buyers, those with previous credit issues and older borrowers to secure a mortgage.
Why is there a need for mortgage rule changes?
After the financial crisis in 2008, mortgage rules became stricter to prevent risky lending, reduce defaults and protect the UK financial system from another collapse. These stricter rules included more stringent affordability checks and income verification as well as tighter limits on debt-to-income ratios and loan-to-value ratios.
However, the way people work has considerably changed since then, as has the way household finances are managed. Lenders prefer the stability of a regular income from full-time employment when assessing borrowers but approximately 12% of the UK workforce is now self-employed. This includes full-time freelancers or contractors, usually with variable incomes throughout the year instead of a set monthly salary. Many borrowers have more than one job, rely on commission payments or bonuses, or earn in a foreign currency.
The average age of first-time buyers has increased as a result of property prices outweighing average earnings. As larger deposits have to be saved, which is increasingly harder in the current cost of living crisis, this pushes the dream of homeownership back considerably. Many people are now looking to secure mortgages later in life, which brings additional challenges when trying to secure a mortgage.
The FCA, therefore, wants to put targeted changes into effect that will enable lenders to be more flexible in their assessments without increasing their risk or compromising borrowers’ protections.
What are the proposed FCA mortgage rule changes?
The proposed changes will enable lenders to be much more flexible when assessing an applicant’s individual circumstances. Rather than adhering to rigid rules on affordability and creditworthiness, they will be able to look at a borrower’s full current financial situation.
This will prevent applicants from being automatically rejected if they have minor credit issues or have had past credit issues. It will also enable those with variable incomes to benefit from flexible repayment structures. Mortgage applicants who are paid in foreign currencies will experience reduced barriers when trying to secure a loan.
The affordability guidance for retirement interest-only mortgages is another proposed change. The FCA wishes to update this so that those who wish to borrow later in life will benefit from more flexibility to unlock the wealth that has built up in their property.
Standard interest-only or part interest-only mortgages may become more flexible, too.
Variable and irregular incomes
Not everyone fits into lenders’ preferred income type of having a standard employed salary. Self-employed borrowers, contractors, freelancers, shift workers, seasonal workers, those earning a foreign income, those earning multiple incomes or those receiving substantial overtime, commission and bonus payments all face additional challenges to prove their mortgage affordability.
The FCA wants to reduce the barriers that lenders face when assessing variable and irregular incomes. That way, they’ll be able to offer borrowers flexible repayment options that are in line with their earnings.
Minor and past credit issues
Applicants who have minor credit problems or have had credit issues in the past, such as a missed payment or default, may find themselves being rejected by lenders. The latter can even be the case if an applicant has since improved their financial situation.
The FCA wants to encourage lenders to consider an applicant’s full and current situation when it comes to assessing them for affordability. Rather than using blanket criteria that may disqualify an applicant, they want lenders to differentiate between an applicant’s past credit performance and their current repayment capacity.
Retirement options
The FCA wants to give more options to older borrowers, with a focus on retirement interest-only mortgages during the consultation. The proposal is to update the affordability guidance for this type of mortgage, which will enable lenders to use more discretion when assessing types of income and repayment strategies. This will help older homeowners tap into the equity that has built up in their property.
Interest-only mortgages
Standard interest-only and part interest-only mortgages may also be addressed if the FCA’s proposed changes come into effect. These types of mortgages can be appealing because the monthly payments are lower than for a repayment mortgage.
However, more interest is charged overall and this makes the mortgage more expensive in the long run. The capital also has to be repaid at the end of the mortgage term and a repayment strategy must be in place for this.
The FCA has proposed that the rules are updated for interest-only and part interest-only mortgages. This will give lenders more flexibility in the products they offer when deemed suitable for some borrowers. This will help borrowers who may not suit a repayment mortgage, although a clear repayment strategy will still have to be in place.
Find a mortgage that suits your circumstances
At the moment, these changes are still proposals. If they do come into effect, they will help to remove some obstacles faced by certain borrowers, making it easier to arrange a mortgage.
For now, if your circumstances aren’t standard, get in touch with us on 01322 907 000. Our specialist mortgage brokers are here to talk through your circumstances and ascertain the options available to you. With in-depth knowledge of lenders’ criteria and market-wide access, they can search for the most suitable mortgage solution for your situation.