The FCA’s recent discussion paper (DP25/2) looks at how to enable sustainable home ownership to help consumers and support economic growth. This includes ongoing alignment with consumer needs such as simpler affordability checks, support for later life lending and a greater focus on customer understanding. Published alongside PS25/11, which is already simplifying certain mortgage rules, the move reflects the FCA’s ongoing move towards streamlined regulation and greater flexibility across the mortgage market.
Making home ownership more accessible
Current affordability rules may exclude potential homeowners who could afford a mortgage but where irregular income makes it difficult to demonstrate earnings. This reflects a broader shift in working patterns including self-employment, zero-hour or short term-contracts, part-time workers or people holding multiple jobs.
These issues are compounded by nationwide earnings that haven’t kept pace with rising house prices, combined with a shortage of new builds. Collectively, these elements present barriers for home ownership and as such, the FCA is exploring options to address the issues, as outlined below.
Interest rate stress test
The interest rate stress test is an integral element of affordability assessments to check if the borrower can sustain payments in the event of a rise in the interest rate. Drawing on wider market data, this test is also important for financial stability, but firms can be too stringent in their interpretation of the rules – which may exclude some borrowers who could afford the mortgage. In March 2025, the FCA reminded firms about the flexibility within the existing stress test. Some lenders have responded by reducing their stress test margins, opening up more borrowing capacity for certain customers. However, many lenders appear to remain cautious and are awaiting the outcome of this latest discussion paper.
The FCA is inviting view on how the stress test could be changed and has made some suggestions including: potentially setting a central stress test rate; changes to the five-year timeline; amending the 1% minimum stress margin; or introducing a product rate margin for a more proportionate approach.
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Regular rent payments could be the sole evidence of affordability
Using regular rent payments as the only proof of affordability may help consumers enter the property market. However, it could introduce risks over long-term sustainability of payments and affect financial stability. For example, both known and unexpected expenditure can be very different for renters versus homeowners.
Differentiated affordability assessments
Firms could increase lending to first time buyers based on their occupation and potential future earnings. The FCA points out that some lenders already offer higher income multiples to certain professions, and is seeking further suggestions on how regulation can promote innovation in this area.
Reviewing the role of shared ownership mortgages
Despite offering a first step into the housing market for many, shared ownership mortgages tend to be more expensive and are mostly provided by building societies. The FCA is considering how existing regulations may present a barrier to entry and affect competition for offering shared ownership loans.
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Revisions to interest only mortgages
Interest only mortgages can provide substantially lower monthly repayments, making mortgages more affordable - which could help first time buyers. However, these types of mortgages present greater risks. For example, the FCA note that historically some customers lacked a clear plan for repaying the loan at the end of the lending term.
The regulator is looking at how to improve interest only mortgages including flexibility to move to and from repayment mortgages, and the role of the repayment vehicle. In terms of the latter, the FCA is thinking about rules to allow the sale of the property to count as the repayment vehicle without the need to consider the sums left over or future housing needs. It’s also considering whether to retain the option for part and part mortgages.
Greater support for vulnerable customers
The FCA is looking at how to support vulnerable customers, particularly victim-survivors of economic abuse and coercion, which could affect existing mortgages. New mortgage rules could offer flexibility to help victim-survivors leave a joint mortgage or transfer it into one name. Options may include reducing repayments for a short time and greater clarity for lenders over when to undertake affordability assessments.
Support for home renovations and building projects
Consumers can currently apply for bridging loans to cover the cost of building works. However, they’re subject to a 12-month limit, which could lead to poor consumer outcomes for longer-term projects. The FCA is considering options to improve flexibility and increase their use, which will also support growth across the construction sector.
Managing climate change
Climate change impacts such as flooding or coastal erosion could affect property values, potentially making them uninsurable and difficult to secure a mortgage. The FCA doesn’t put forward any regulatory interventions but opens the floor for wider market input.
Supporting later life lending
Customers are opting for longer mortgage terms, with 45% of first times buyers opting for 35-year mortgages in 2024, and more people are entering the housing market later in life. As a result, many customers will be making mortgage repayments during their retirement and lenders need to consider how to deliver good customer outcomes throughout. Issues around later life lending are heightened by the comparatively expensive cost of products such as lifetime and retirement interest-only mortgages.
While borrowing over longer terms can reduce monthly repayments and help affordability, there is a trade-off. Customers with longer terms will typically pay more interest in total, take longer to pay off capital. They could also find there’s less flexibility for further term extensions, which may create challenges for future purchases.
With many people relying on the value of their home to fund retirement plans, effective advice is going to become even more critical. However, the FCA notes some weaknesses in advice quality from some lifetime mortgage advisors. Future mortgage rules could support the provision of more holistic advice to support borrowers making use of later life lending.
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Boosting consumer understanding and innovation
The FCA recognises that there have not been significant volumes of complaints about first-charge mortgage advice since the Mortgage Market Review. But its supervisory work has identified some poor practice in niche areas including lifetime mortgages. It also acknowledges that many advisors go above the required standard. While many customers won’t need it, the FCA is exploring whether enhanced advice could help some cohorts, for example:
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To standardise the quality of advice and promote good customer outcomes, the FCA may update qualification requirements. In some circumstances, the regulator could mandate the level four mortgage advice qualification, or the level three equity release qualification, in addition to the standard mortgage advice qualification.
A clearer disclosure regime could also make it easier for customers to understand and compare information across the mortgage market. The current framework is potentially complex and prescriptive, and a simpler approach could alleviate the regulatory burden on firms. The FCA is seeking views and input as to how the disclosure requirements can be improved. This includes the possibility of an outcomes-based disclosure regime that is underpinned by the Consumer Duty and supplemented by certain event-driven disclosure requirements.
Good use of technology and innovation can further streamline these kinds of activities, with emerging tools such as open banking and distributed ledger technology creating new possibilities. For example, greater connectivity could increase the pace of the home-buying process and improve consumer protection.
Addressing risk appetite in the mortgage market
The FCA aims to rebalance lenders’ risk appetite across the mortgage market, supporting greater home ownership and promoting growth. However, it recognises the delicate balancing act between increased mortgage access, possible house price inflation and the potential for greater defaults.
Greater risk of arrears
Changes to affordability rules could affect consumers’ ability to repay, resulting in serious arrears or repossessions. Some cohorts may be more likely to fall into arrears, such as those with lower levels of financial resilience. Furthermore, arrears are higher on second-charge mortgages and the FCA suggests future mortgage rules could allow lenders to differentiate their risk appetites for different types of mortgages. This could reduce the potential for foreseeable harm and poor customer outcomes.
The FCA also notes lenders’ costs associated with repossessions, and if repossession numbers increased substantially, this could reduce lending capacity in the longer term.
Rising house prices
A stronger risk appetite could see a surge in demand, and unless there’s corresponding growth in new home building, that could drive housing prices up, squeezing affordability even further. The FCA is also working with the Government to understand how its regulations may interact with building programmes.
Looking ahead
The FCA wants to create a pragmatic future mortgage market that recognises the range of practical challenges consumers face when buying a home. From changes in employment styles, to later life lending, to greater family support for a deposit – the FCA is aiming to create a robust framework to support real-world customer needs. This reflects the regulator’s increasing reliance on behavioural data, such as the Financial Lives Survey, to inform and shape regulation.
Moving forward, lenders could see significant changes to affordability rules, and the ability to differentiate their risk appetite for different products. This would put a greater onus on lenders to demonstrate robust internal controls and customer understanding. Accordingly, firms will need to re-evaluate current mortgage processes, with a particular focus on advice models and the potential risks of execution only processes. With the potential removal of advice triggers, firms need to make sure that execution-only channels are not inadvertently exposing customers to harm.
For more information on the FCA mortgage rules contact Darren Castle.
