Changes to mortgage affordability rules by the regulator would allow homeowners to switch to cheaper deals.

The Financial Services Authority (FCA) has proposed changes to lender affordability checks for remortgage buyers that are up to date with their payments and do not need a further advance.

Current rules prevent homeowners from switching to cheaper deals if they cannot meet the affordability criteria of new lenders, resulting in mortgage prisoners paying high interest rates.

Lenders are required to check the affordability of first time buyers, home movers and switching remortgage buyers including income levels, outgoings such as child care, holidays and living costs.

An option for older homeowners would be a retirement interest only mortgage (RIO) which requires affordability checks or equity release using a lifetime mortgage where no evidence of earnings is required and important for borrowers on lower incomes.

Relaxing affordability rules

Most active lenders offer product transfers for borrowers when their existing deal ends, without the need of affordability checks.

There are 150,000 mortgage prisoners paying higher interest rates of which 120,000 are with lenders not regulated by the FCA, a further 20,000 are with inactive lenders and unable to pass affordability checks with a new lender.

There are 10,000 people with authorised lenders that are up to date with their payments but unable to move to a cheaper deal and the lender has agreed to help these borrowers switch to cheaper deals.

New remortgage buyers will not be assessed by existing affordability rules as lenders must only check the borrower has made all repayments in the last year although there may be an upper age limit for the mortgage of age 70 or 75 years.

If you now have to repay your current interest only mortgage, you must either downsize your home to a smaller property that may not be suitable for your needs or you can arrange a lifetime mortgage.

The lifetime mortgage allows you to live in your home for life, you can let the interest roll-up and make no monthly repayments, make penalty free overpayments up to 10% of the property value to pay the interest as you go reducing the cost of equity release.

Lenders must ensure that the new deal is more affordable than the current one with a lower interest rate and lower monthly repayments over the introductory offer including upfront fees.

If you are an older homeowner relocating and buying a new property, you have to show that you can afford a larger mortgage which is stressed tested by the lender should interest rates rise in the future whereas with equity release this is not required.

See what the maximum equity you can release if you intend to buy a home in a new location and the interest rates using this link:
Free equity release calculator with instant results to buy your new property.

The proposals will remove the need for stress tests checking if homeowners could afford rising interest rates in the next five years, making it easier for them to switch to lower cost deals.

These rules do not apply to buy-to-let landlords as lender stress test must show the rental income can exceed 145% of a notional higher mortgage interest.

More help for mortgage prisoners

Proposals from the FCA would also apply to interest only mortgages allowing homeowners that cannot afford the repayment mortgage if they switched to benefit from cheaper deals.

There would be help for borrowers of inactive or unregulated lenders requiring them to contact customers that are up to date with payments and on the standard variable rate to offer a switch to a new deal.

The FCA wants to make it easier for homeowners to find suitable mortgage offers by encouraging innovation from industry to help customers with advice on affordability and eligible products.

The regulator wants to help customers compare mortgage brokers as they are an important factor in determining what homeowners pay for their mortgage.

For equity release buyers, the types of plan structures to consider can have different costs especially if you intend to repay more than 10% or all of the mortgage early.

Some homeowners are excluded from the new rules if they are in arrears, have high loan to value mortgages, have considerable debts or are in negative equity where the mortgage is greater than the value of the home.

What are your next steps?

For older homeowners releasing equity from your property, our LCM mortgage advisers can recommend the lifetime mortgage and you can make a decision by talking to your family.

Find out more about the latest interest rates and provider products that can free you from being a mortgage prisoner with this link:
Free equity release quote to help free you from being a mortgage prisoner.

At London City Mortgage our mortgage advisers can select the leading providers and products. Learn more by using the equity release calculator, property value tracker chart and mortgage costs calculator.