The mortgage market is on the brink of potential change as the Financial Conduct Authority (FCA) signals a review of the strict lending rules implemented post-2008.
In a recent letter, the FCA acknowledged the need to simplify regulations, striking a better balance between protecting borrowers and expanding access to homeownership, a move likely to be welcomed by lenders and brokers alike.
One area that is overdue for reconsideration is the use of interest-only mortgages. While these remain technically available, stringent criteria have made them inaccessible to most borrowers. Much of this stems from past scandals, such as the mis-selling of endowment policies, which created significant consumer distrust.
However, today’s mortgage market is a very different place. The industry has evolved, becoming more professional and transparent. With appropriate safeguards, interest-only lending could play a valuable role, particularly for borrowers aged 55 and over. Many of these customers are financially secure and responsible, representing a strong opportunity for lenders willing to embrace this niche.
To ensure this product works effectively, safeguards should be embedded into the process. For example, requiring a mandatory face-to-face meeting with a solicitor prior to completion (already standard practice for lifetime mortgages) could ensure borrowers fully understand their commitments. Clarity and education are critical for protecting customers while allowing them the freedom to choose the solutions that suit their needs.
Another potential benefit lies in addressing the limitations of retirement interest-only (RIO) mortgages. Currently, joint applications often falter under strict affordability rules, leaving many older couples unable to access this product.
It’s difficult to avoid the perception that older borrowers are at times unfairly disadvantaged in the lending market. With careful adjustments to policy, this imbalance could be redressed, offering tailored products that genuinely meet the needs of an aging population.
The FCA’s willingness to reconsider outdated policies opens the door for innovative thinking. By combining robust safeguards with flexible criteria, lenders and brokers could provide solutions that both expand access and protect borrowers. Interest-only lending, if approached thoughtfully, has the potential to deliver significant value, not only for borrowers but for the mortgage industry as a whole.
Malcolm Davidson is managing director of UK MoneyMan
