FCA proposes more flexible mortgage lending rules

What does this mean?

The consultation marks a further step in the FCA’s strategy to “rebalance risk”. In the mortgage market, the FCA says this means accepting that higher risk products may lead to poor outcomes for some consumers, but this is balanced by the benefits of increased homeownership. The regulator also stresses that the proposals are targeted and are not intended to open up higher-risk products to all borrowers.

Alongside the consultation, the FCA published analysis on the drivers of arrears among first-time buyers. This found that some groups, including self-employed borrowers and those with a history of credit impairment, show higher rates of arrears. However, the FCA says uncertainty around firm and borrower behaviour means it cannot reliably quantify the impact of the proposals on arrears. The FCA is therefore accepting some potential increase in arrears as part of its risk rebalancing approach, but expects this to be contained by affordability requirements, prudential safeguards, the Consumer Duty and firms’ risk management. 

The FCA also acknowledges that its rules form just one part of the broader ecosystem affecting sustainable access to home ownership. 

Interest-only mortgages

The most significant proposals relate to interest-only and part interest-only mortgages, which are intended to support some first-time buyers and other borrowers, rather than make interest-only universally accessible. The FCA is proposing to: change when a ‘credible repayment strategy’ is required, broaden the types of strategy firms can accept, and give lenders more flexibility in how they assess credibility.

The FCA proposes to remove the current requirement for borrowers to have a credible repayment strategy where the interest-only element is less than 25% of the lender’s valuation.

Where a repayment strategy is required, the FCA proposes to move beyond a purely evidence-based approach. It plans to add the following as examples of credible repayment strategies: conversion to a repayment mortgage (which may be relevant where a borrower expects their income to rise over time); and follow-on products, such as retirement interest-only or lifetime mortgages.

Where documentary evidence is not reasonably available or obtainable, lenders could instead make a reasonable assessment of credible repayment strategy following a tailored interactive dialogue with the borrower. The dialogue would need to reflect the customer’s individual needs and circumstances, and provide enough information for the lender or intermediary to assess whether the proposed strategy is credible. The level of information required would be for the firm to decide.

The FCA also proposes a more nuanced approach where sale of the main property is the repayment strategy. Where the interest-only amount is between 25% and 50% of the lender’s valuation, lenders would no longer need to consider whether the property would provide enough equity to buy a cheaper property. Where the amount is above 50%, that requirement would still apply, and the FCA proposes to clarify that the cheaper property would need to be capable of being purchased mortgage-free.

Retirement interest-only mortgages

For retirement interest-only mortgages, the FCA proposes to remove guidance requiring firms to assess whether a surviving joint borrower could continue to make payments if the other borrower dies. The FCA says this would allow firms to take a more flexible, risk-based approach, supported by the Consumer Duty.

Borrowers with non-standard income

The FCA notes that its current rules do not prevent lenders from agreeing non-monthly payment schedules, such as quarterly payments, where appropriate for the customer. However, it plans to make this clearer by changing Handbook references to “monthly” payments, and expanding its guidance on affordability assessment evidence for borrowers with variable or irregular income. The FCA believes this could improve access for groups such as the self-employed, contractors and seasonal workers, provided firms explain the implications clearly and meet Consumer Duty expectations.

Credit-impaired borrowers

For credit-impaired borrowers, the FCA wants to clarify that the Handbook definition of a “credit-impaired customer” was developed for reporting and specific use in the affordability rules for debt consolidation mortgages. It is concerned that some firms are applying the definition more broadly, including where a borrower has recovered from historic credit issues. While firms remain free to set their own credit risk appetites, the FCA says lenders should not treat the glossary definition as a factual indicator of unaffordability. It expects firms to distinguish between historic adverse credit and current or emerging financial difficulty.

Foreign currency loans

The FCA proposes to simplify rules for foreign currency loans, moving away from prescriptive Mortgage Credit Directive-derived requirements towards a more outcomes-focused framework. It plans to distinguish between loans denominated in a non-sterling currency and sterling loans supported by foreign currency income, with lighter requirements for the latter, including removing conversion rights and exchange-rate movement warnings.

Bridging loans

For regulated bridging loans, the regulator proposes to extend the maximum term from 12 to 24 months, including extensions. This aims to reduce the need for re-bridging where property chains, probate, renovations or self-build projects take longer than expected.

What do firms need to do?

The proposals create more space for commercial choice and flexibility, but also put more weight on firms’ own risk appetite, governance and outcomes monitoring. 

All lenders should assess the proposals against their strategy, target markets, systems capabilities and risk appetite. The permissive nature of the proposals means take-up may be uneven, and firms should consider how competitors’ responses may affect their market position. 

Lenders should also review whether their approach to credit-impaired borrowers is consistent with the FCA’s expectations.

Firms looking to use the flexibilities to pursue new opportunities should ensure any shifts in lending criteria are conscious, board-level risk appetite decisions, rather than the unintended consequence of margin or competitive pressures. Prudential constraints, conduct risk, data quality and operational capability may limit how far firms are willing or able to move. Firms should also monitor the cumulative impact of any changes alongside other Mortgage Rule Review developments, including the FCA’s stress test clarification and high loan-to-income lending, particularly where risks may be layered.

Strong controls will matter more in a regime with greater discretion. Many of the proposals move away from prescriptive rules towards a more outcomes-based framework, which will require firms to exercise greater judgement in areas such as credible repayment strategies, tailored affordability assessments and risk mitigation. Firms should review underwriting policies, affordability models, credit risk criteria, product and distribution governance, and arrears monitoring, including how they will make consistent and defensible decisions at scale. 

Firms should also ensure they can identify and manage layered risks, such as interest-only lending combined with high LTV, variable income or historic credit impairment. Data and technology will be key enablers and safeguards where firms make more tailored affordability and credit decisions. Open Banking and other alternative data sources may help firms evidence affordability, monitor outcomes and identify early signs of distress, particularly for borrowers with variable income or historic credit issues.

Consumer Duty outcomes will be critical. More flexible products may improve outcomes for some borrowers, but can also expose customers to higher lifetime interest costs, repayment strategy risk, house price risk or equity erosion. Lenders and intermediaries will need to evidence that foreseeable harm is identified and mitigated, advice is suitable, product design remains aligned to the target market, and communications explain risks and trade-offs in an understandable way. Firms will also need robust MI and outcomes monitoring to identify early indicators of poor outcomes.

Next steps

The consultation closes on 28 July 2026, and the FCA is also seeking consumers’ views through an online tool to help shape its approach. The FCA plans to publish a policy statement by the end of 2026. 

The regulator continues to progress policy development across other aspects of the Mortgage Rule Review, including later life lending.