UK Finance has published its response to the Financial Conduct Authority’s (FCA’s) Mortgage Rule Review, suggesting it consider a wider pool of borrowers who struggle to access lending and introducing a minimum stress rate for affordability.
In the Discussion Paper DP 25/2, the FCA said affordability assessments could be changed to serve more people such as first-time buyers, the self-employed and people on variable incomes.
UK Finance said the regulator could go further by looking at people who are lending into retirement, particularly as average first-time buyers get older and mortgage terms extend.
It said the market should “evolve” to support people who will end up borrowing into retirement.
UK Finance also proposed considering people paid in foreign currency, as lenders faced “onerous regulatory and operational hurdles”, making it restrictive for these borrowers. Further, the organisation said people who struggled to prove their creditworthiness should be regarded, suggesting that the FCA’s current definition of a credit-impaired customer could cause barriers.
It said: “A member suggested that the FCA may wish to review its definition, particularly regarding County Court Judgments in light of forthcoming legislation to publish claimant data that will help to differentiate types of judgements made.”
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The FCA could also consider people with different household structures and how they access mortgage finance, such as people going through a relationship breakdown, including victim-survivors, and single adult households.
The use of pensions in affordability
UK Finance said that although people had to provide evidence of pension contributions when borrowing into retirement, evidence suggested this did not prove or guarantee that a pension would cover mortgage repayments in retirement years. It added that this could pose a “challenge” for self-employed workers, as just a fifth who earned more than £10,000 a year saved into a pension.
One member of UK Finance proposed reviewing the rule to allow more flexibility in the early years of a mortgage term, and another suggested looking at other ways to demonstrate affordability in retirement such as savings, investments and other properties.
Another “larger lender” asked the FCA to remove the requirement altogether.
Introducing a minimum stress rate
The FCA’s discussion paper proposed the introduction of a central stress rate for mortgage affordability and different assessments for certain borrowers.
UK Finance said many of its members, including a larger lender, wanted the regulator to go further and bring in a minimum stress rate. It was suggested that this would create a “consistent baseline” across the sector and enable safeguards through interest rate cycles.
Firms would be able to set a higher rate if needed.
Lenders say ‘no’ to basing affordability on rental payments
UK Finance said rental payments were “fundamentally different” from mortgage commitments, as mortgages were more complex, with “significant” risks and legal obligations.
For this reason, “a significant number” of UK Finance members did not agree with rental payments being the sole basis for a borrower’s affordability. Lenders said rental payments should be benchmarked against stress tested mortgage payments to test a borrower’s resilience to future rate rises.
Product innovation
The FCA’s DP asked if it should encourage the take-up of long-term fixed rate mortgages, and UK Finance members said customer behaviour suggested borrowers preferred shorter-term deals.
It also said some of its members that offered long-term fixes said they were able to do so within existing regulations.
However, the organisation noted there were challenges to funding fixed rates of longer than 10 years, as it was not currently possible to book trades for longer than a decade. It suggested making more funding channels available from diverse sources, saying that access to this funding would support innovation.
In response to the FCA supporting the increased use of interest-only mortgages, UK Finance members were “skeptical” of its use, especially among first-time buyers who were unlikely to have a suitable repayment vehicle.
It said there was potential for innovation with the product, but said to support first-time buyers, the FCA should review its rules and consider removing minimum equity requirements and easing part interest-only loan to value (LTV) limits.
It suggested the use of low start mortgages, where borrowers begin on interest-only payments before staircasing to a repayment mortgage during the term.
UK Finance members said assessing whether one borrower could afford mortgage payments when the other party died was a barrier to retirement interest-only (RIO) mortgages. It said the rules could be changed to allow existing borrowers who were able to demonstrate they could afford interest-only payments but were unable to pay the full outstanding balance, to switch to a RIO without a full affordability assessment.
Careful use of AI and ‘tolerable’ harm around greater mortgage access
UK Finance members expect artificial intelligence (AI) to play a bigger role in execution-only sales, particularly after the removal of the advice interaction trigger.
They said current regulation was enough to enable innovation, but wanted guidance on how this would work with Consumer Duty.
Members said the use of AI to deliver mortgage advice needed to be “carefully managed and tested” to ensure good customer outcomes, but said there was potential for AI to handle simpler advised cases.
Lenders added that they did not expect AI to replace the role of intermediaries, saying many customers preferred to interact with a human. It said AI could improve and support adviser productivity, as well as identify vulnerable customers.
It asked the FCA to clarify the boundary between advised and execution-only sales for digital journeys where AI was used.
Regarding the FCA’s suggestion that a separate ‘enhanced advice’ category may be needed for some borrowers, UK Finance members said this was not necessary and would be “disproportionate to the limited value it could add”. It said existing silos between mainstream and later life lending already created a “two-tiered advice market” and an enhanced advice qualification could “deepen the problem”.
Members also said later life lending should not be “further carved out” from the rest of the market, believing it should be more mainstream.
Members suggested reviewing the minimum advice qualification to include all later life solutions.
UK Finance said the current regulatory regime worked to avoid foreseeable harm at an individual level, but did not remove the risk of harm caused by wider economic events.
Some members said foreseeable harm worked on an individual customer level, but tolerable harm should work at a macro or aggregate level.
“Foreseeable harm can be forward-looking, and tolerable harm can be backwards-looking,” it added.