The FCA’s recent Discussion Paper DP25/2 provides a timely look at current mortgage affordability rules and, importantly, opens the door to a potential rethinking in how we serve creditworthy, underserved segments of the market, such as first-time buyers, and in a wider sense all those who require high LTV mortgages.
While the FCA has yet to commit to loosening its approach to LTI caps or affordability stress testing, it is clearly signalling an openness to more flexible, risk-based frameworks.
These could include regional affordability adjustments, evidence-based affordability through rental history, or closer alignment with actual spending behaviour. Feedback is required in this area, but it appears that – if there is an industry appetite to move in this direction - then there is a willingness to look at these alternative options.
We’re all acutely aware that since the Credit Crunch the market has been working to a highly prescriptive regulatory process – with very good cause of course – however in the last few years at least, it has seemed increasingly likely that a review of those rather blunt tools needs to happen.
Key amongst the reasons for this has been the ability, or otherwise, of large numbers of individuals – who in a different house price/affordability/product availability era, would have been able to have still secured a mortgage to buy a first property – not being able to get a foot on the ladder.
All of this, of course, has to be taken into account by the FCA. For lenders, one of the major questions they are likely to be asking themselves isn’t just focused on what the regulator might allow them to do in the future, it’s about what they themselves are prepared to do if those rules are relaxed?
The paper signals potential room for manoeuvre but what, for example, about prudential standards? The FCA makes it clear that any loosening would need to be paired with robust safeguards, sound risk management, and a continuing duty to ensure good consumer outcomes.
So even with more regulatory space to innovate, many lenders may remain cautious. Why? Because risk appetite is ultimately a board-level decision, influenced not only by regulation but by capital treatment, shareholder expectations, and macroeconomic uncertainty.
During the pandemic, for example, we saw lenders exit or restrict higher LTV lending not because they were prohibited from doing so, but because they judged the risk/reward trade-off to be unappealing.
The discussion paper doesn’t focus heavily on LTV per se, but the implications are clear. If lenders were to adjust affordability criteria, perhaps in light of proven rental behaviour or more realistic stress tests, it follows that more borrowers could qualify for higher LTV loans.
However, such moves would entail greater balance sheet exposure, although we know many lenders are already active in this space, and use private mortgage insurance to mitigate such risks. These instruments allow lenders to absorb credit risk while still protecting their downside exposure. In that context, it’s feasible that a more flexible affordability regime, coupled with insurance, could prompt some lenders to expand their high LTV activity, if the economics stack up.
But that’s an unknown. After all, the market is already equipped with two risk-mitigation levers, private and flexible mortgage insurance and the soon-to-be-relaunched mortgage guarantee scheme from the Government.
Despite this, current activity in the high LTV product space is not overwhelming. Supply has grown but this has been a slow and steady change. Perhaps lenders are waiting for movement from the FCA on affordability and stress-testing as outlined above? Or perhaps they are comfortable with their current activity and have no plans to do more, even with a relaxation of the rules?
So will DP25/2 be the catalyst that changes that? Possibly, but only if lenders feel they can still lend safely and responsibly, and within their capital and risk appetite frameworks. And that will depend on how any future regulatory reforms are implemented, not just in spirit, but in practice.
The bottom line is this: regulation may well evolve to provide more headroom, particularly for underserved segments like those requiring high LTV. I’m sure it will signal a moment for some lenders to act, or act further, and we would certainly argue strongly that they use all the options available from the private mortgage insurance providers as well in order to mitigate any risk.
But lenders will only move into that space if they are supported by a parallel ecosystem of those credit risk tools, stable funding, and critically, confidence that they can do so without inviting undue scrutiny or exposure.
As ever, the challenge is to balance access with responsibility. DP25/2 is an important step in that journey but it’s not just about what the FCA allows, it’s about what lenders believe is prudent. And whether the combination of regulation, risk transfer, and support finally creates the conditions where doing more at higher LTVs becomes not just possible, but genuinely attractive.
