Fundamental changes to the way borrowers are stress tested, including scrapping the five-year fixed term used or adopting a rent-based approach, are among suggestions to improve the accessibility of mortgage finance put forward by the regulator.
As the Financial Conduct Authority (FCA) continues its investigation into how its mortgage rules can be simplified and made more flexible, the regulator has released a discussion paper packed with ideas to shake up lending.
The aim of the discussion paper is to create a public conversation on the future of the mortgage market and the 8.96 million regulated mortgages.
The paper, which runs to over 70 pages long, considers ways to offer more support to under-served borrower groups in the market, namely first-time buyers, the self-employed and those on variable incomes. It also explores ways to improve access to mortgage finance for later life borrowers.
One of its main areas of focus is to change the rules around the way mortgage affordability is stress tested, established in 2014.
“We think the existing stress test could be clearer,” wrote the FCA.
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In March, the FCA released its call for evidence on the interest stress rate rule. In the statement, it reminded lenders that they have the flexibility to design their test in a way that is appropriate for the customer’s mortgage following the removal of the Financial Policy Committee’s (FPC’s) 3% stress rate margin in 2022.
The regulator used the discussion paper to make clear its thoughts on how lenders have applied the stress rate.
“We think that, where interest rates are projected to fall, the way most firms applied the rule before our March statement may have unnecessarily restricted otherwise affordable mortgages,” it said.
Changes to the mortgage stress test
To improve access to borrowing, the regulator has floated the following options:
- Create a central stress rate whereby the FCA develops its own forecasting model that would set a universal standard that firms would be unable to game.
- Change the five-year fixed term used in stress rates by removing it and applying the stress test to all mortgages or by extending it to, for example, 10 years.
- Amend the 1% minimum stress margin that must be applied or remove it and implement a regulatory margin on present product rates.
- Consider alternative rent-based affordability tests that allow past payments of rent alone to prove affordability.
- Apply differentiated affordability assessments; for example, increasing lending to first-time buyers based on their expected career trajectory.
The FCA is calling for comments to be submitted by 19 September.