Imagine finally being able to afford a home because your mortgage monthly payments are lower – but only if you can prove you have a plan to repay the full loan at the end. For years, interest-only mortgages have been a risky option, available to few, leaving many creditworthy borrowers locked out of homeownership. Now the City regulator wants to change that.
The Financial Conduct Authority (FCA) has proposed major reforms to the mortgage market, aiming to help more people – especially first-time buyers, older borrowers and the self-employed – access mortgages. Under current rules, some groups are "underserved" because the market has not kept up with modern lifestyles, the FCA says. Its consultation, open until July 28, suggests making it easier to get interest-only and part interest-only mortgages, and encouraging lenders to take a more individualised approach when assessing creditworthiness.
“FCA proposals to widen mortgage access for first-time buyers, self-employed, and older borrowers explained.”
Interest-only mortgages let you pay only the interest on the loan during the term, with the original amount repaid in a lump sum at the end. This keeps monthly payments lower, but has been controversial since the 2008 financial crisis because many borrowers later struggled to repay the capital. Stricter affordability rules were introduced in 2014 under the Mortgage Market Review, including a requirement for a "credible repayment strategy" to cover the capital at maturity. The FCA now believes that, with those protections in place, it can safely widen access.
For UK readers, the changes could be a lifeline. First-time buyers might get on the ladder sooner; older homeowners could unlock wealth built up in their property; and self-employed people with fluctuating incomes may find lenders more flexible. One key proposal: where the interest-only part of the mortgage is less than 25% of the property valuation, the FCA would remove the need for a separate repayment strategy, simplifying the process. However, the FCA stresses the changes are "targeted" – interest-only mortgages won't become universally available.
The regulator also notes the risk of adverse consequences for some consumers, but says it has "carefully considered" the dangers of renting longer if people can't buy. David Geale, executive director at the FCA, said: "We're living longer and how many people work has changed. Our mortgage rules need to keep pace so those who can afford to repay can borrow."
Q: Will interest-only mortgages be available to everyone? No. The FCA says the changes are targeted – for example, where the interest-only portion is small (under 25% of the valuation). Lenders will still assess affordability, but may have more flexibility.
Q: When will the new rules come into force? The consultation closes on July 28. If approved, the rules could start coming into effect later this year, according to reports.
Q: Are there risks with these changes? Yes. Interest-only mortgages carry the risk that you cannot repay the capital at the end. The FCA has considered this, but argues that stronger protections since 2014 mean the risks can now be managed.
The FCA will review feedback from the consultation before finalising any rule changes. Lenders, brokers and consumer groups will have their say, and the outcome is expected later this year. For now, the proposals signal a shift towards a more flexible mortgage market – but borrowers should still think carefully before choosing an interest-only deal.