The Financial Conduct Authority (FCA) has unveiled a package of reforms designed to streamline mortgage regulation, making it easier for borrowers to remortgage and adjust their loan terms, in a move the regulator says will help people better navigate their financial lives.

The changes will enable consumers to reduce their mortgage term more easily – potentially lowering the total cost of borrowing — and to switch to cheaper deals with new lenders without facing the full extent of existing affordability assessments.

The FCA said the new measures would save time and money for borrowers, while also maintaining key protections such as access to mortgage advice and effective affordability checks.

The measures form part of a broader mortgage market review being delivered at pace by the regulator. These include withdrawing certain pieces of legacy guidance to reduce the regulatory burden on lenders.

NOT MANDATORY

While the changes are not mandatory, the FCA is urging firms to make use of the flexibilities to help expand access, support innovation and strengthen competition across the market.

“We want lenders to use these changes to innovate and better serve aspiring homeowners and existing borrowers”

Emad Aladhal, director of retail banking at the FCA, said: “We are helping more people navigate their financial lives by supporting those who can afford to buy a home and supporting competition in the mortgage market.

“Consumer needs have changed over recent years, and our rules are changing too. Today’s changes support growth by simplifying some of our rules, saving consumers time and money, while ensuring they still benefit from advice, where needed.

“We want lenders to use these changes to innovate and better serve aspiring homeowners and existing borrowers. These reforms are another significant step in our mortgage rule review, which we’re delivering quickly.

“They are supported by the strong protections we’ve already put in place for consumers in the mortgage market.”

HIGH STANDARDS

The reforms are made possible, the regulator said, by the high standards already embedded in the system.

These include robust affordability requirements, clear support mechanisms for those facing financial difficulty, and the wider framework provided by the Consumer Duty, which places an obligation on firms to deliver good outcomes for their customers.

RULES HAD BECOME INFLEXIBLE

Karen Noye, mortgage spokesperson at Quilter, welcomed the announcement as the beginning of “much-needed progress for borrowers” but noted that the need to legislate for flexibility in affordability testing was a sign of how inflexible existing rules had become.

“As part of this, the FCA has announced it will remove the requirement for a full affordability assessment when reducing the term of a mortgage, and is amending modified affordability assessments to include new mortgage contracts with new lenders where the product is more affordable for the customer,” she said.

Noye highlighted the growing trend towards long mortgage terms – often extending into retirement – and pointed to government data suggesting future pensioners are likely to be significantly poorer than those retiring today.

HIGHER MONTHLY REPAYMENTS

While reducing the term of a mortgage could help to mitigate that pressure, she warned that such changes would also typically mean higher monthly repayments, which may not be manageable for all borrowers.

“It may be better to maintain the length of the mortgage to keep the committed monthly payment down.”

“In some cases, for example, rather than reducing the mortgage term it may be better to maintain the length of the mortgage to keep the committed monthly payment down, but to overpay which will in turn reduce the mortgage term and lower the amount of interest paid,” she said.

The reforms come alongside other government moves to address mortgage affordability, including a recent announcement from the Treasury that the mortgage guarantee scheme will be made permanent.

INCREASING FLEXIBILITY

But while the FCA’s changes are aimed at increasing flexibility and reducing friction for borrowers who can already access competitive deals, they do not directly tackle the persistent challenges faced by first-time buyers or those with higher loan-to-value ratios.

Noye also warned that wider economic conditions continue to weigh heavily on affordability. Despite recent optimism that the Bank of England may begin cutting rates later this year, inflation data published earlier this month came in higher than expected, prompting speculation that rate reductions may be delayed.

“For buyers, this means affordability remains a key constraint – regardless of these changes – particularly for those relying on fixed-rate deals to manage stretched budgets,” she said.

SIGNIFICANT STEPS

Paul Matthews, senior director of risk at independent financial services consultancy and credit risk specialists Broadstone, added: “The FCA is taking significant steps to make it easier for consumers to make changes to their mortgages and get better support on their available options.

“The easing of regulation will allow lenders greater flexibility to innovate in the market and provider homeowners with more choice.

“Mortgage lenders operate in a highly regulated environment and so these latest reforms should support more flexible home ownership with minimal additional risk.

“Lenders will need to ensure their risk management and modelling framework is robust so they can continue to spot those consumers who need advice or other support.”