Interest-free mortgages – at one time the most popular way of funding buy to let investment – may be on the way back.
The idea is part of the Financial Conduct Authority’s review of the mortgage market to try to make it easier to borrow.
The last Mortgage Market Review by the FCA triggered strict stress testing and affordability requirements – now regarded as too onerous.
In a discussion paper on the future of the mortgage market, the FCA says it would like to hear views on “whether our rules could better support more interest‑only mortgages”.
It says it is particularly keen to explore how lenders can better support groups currently underserved by the market, including individuals on variable incomes and aspiring first-time buyers.
It adds: “Interest‑only mortgages could be suitable for consumers who may struggle to afford a repayment mortgage and can support sustainable home ownership.”
David Geale, executive director for payments and digital finance at the FCA, told the media: “We’re starting a public conversation on the future of the mortgage market, to see what we can do to help consumers navigate their financial lives and to support growth.
“So it’s very much at that discussion end of: Here are some thoughts, where should we be on the spectrum of balancing risk versus opportunity?
“The areas we’ve opened up for discussion I think will benefit a wide group of people.
“But we are particularly looking at some of the constraints we see around people who are self-employed, people with volatile or unpredictable incomes, people maybe in vulnerable circumstances, who may be a good mortgage risk from a lending perspective, but the rules may be too rigid to allow lenders to look at them a bit more holistically.”
Other FCA proposals being considered include whether the regulator should intervene to support the take-up of long-term fixed-rate mortgages; whether a rent-based affordability assessment would be a responsible basis to assess a consumer’s ability to repay a mortgage; and whether the regulator should take further steps to support part interest-only and part capital repayment (“part and part”) mortgages.
Matt Smith, Rightmove’s mortgage expert, says: “It’s really promising that the regulator is opening up these discussions, and continuing to look at targeted regulatory changes that could help people in different circumstances to borrow what they need to buy a home. We particularly welcome the potential to help more first-time buyers that can afford it to borrow more responsibly, and have access to sustainable home-ownership.
“When you consider that many future first-time buyers are trying to save up their deposit, while paying advertised rents which are 41% more than five years ago, the challenge for this group in particular is clear.
“There are also some significant regional differences in property prices to be mindful of in discussions about enabling people to borrow more, with the gap between average earnings and property prices more stretched in the South of England than the North of England, Scotland and Wales.
“The desire to support more people in achieving their home ownership aspirations needs to be balanced against the potential risks of allowing people to borrow more, so that mortgage lending continues to be responsible.”
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