Policy Statement
PS23/8
Mortgage Charter: enabling
provisions
June 2023
Contents
1 Summary 2
2 Handbook changes 5
1
0
Annex 1 Abbreviations used in this paper
Annex 2 Compatibility statement
1
1
Appendix 1 Made rules (legal instrument)
1
4
1
1 Summary
1.1 We are amending our Mortgages and Home Finance: Conduct of Business (MCOB)
sourcebook to support the implementation of the Government’s Mortgage Charter,
published on 26 June 2023. The changes enable mortgage lenders to meet their
commitments under the Charter, which builds on the previous work we and lenders
have done to support borrowers.
1.2 In June 2022, we issued a ‘Dear CEO’ letter to lenders, setting out our expectations
of how they can support their customers given the increasing cost of living. Our
recent Guidance published in March 2023 set out further ways firms could offer
support in line with our existing rules.
1.3 We are currently consulting on making our Tailored Support Guidance (TSG)
permanent. We issued the TSG during the pandemic for mortgages, overdrafts and
consumer credit. Our proposals strengthen what we expect from lenders when
dealing with customers who need tailored support, often through forbearance.
1.4 All borrowers are having to manage financial challenges from the increased cost of
living. Those on expiring fixed and variable rate mortgages are also facing the rising
costs of increased interest rates. Over the next 12 months, 1.7 million fixed rate
deals will expire, with 893,000 expiring before the end of this year. Many of these
fixed rate deals were agreed at a time when interest rates were at an historic low.
The median interest rate for deals expiring in Q3 2023 is 2.07% and in Q4 2023 is
1.95%. In contrast, median rates for new deals today are currently above 6% and
expected to rise further. Over the next year we expect many borrowers will face a
significant increase in their monthly mortgage payments. We project that the biggest
increase in the number of ‘financially stretched’ borrowers will occur between July
and September 2023.
1.5 Given this, and the number of consumers affected, we are introducing changes to
our Handbook without consultation, to support the implementation of the
commitments made under the new Mortgage Charter.
1.6 We are amending our responsible lending rules (MCOB 11.6). These changes mean
lenders do not need to undertake an affordability assessment when varying a
contract to allow a customer to make reduced capital payments (including to zero,
and paying interest only) for up to 6 months, or when reversing a term extension
within 6 months of it taking effect.
1.7 These are limited exemptions from our affordability requirements. Lenders will still
need to assess affordability if a borrower wants to permanently convert to an
interest-only mortgage or to extend the term of their mortgage beyond their
expected retirement date.
1.8 Where these options are used, both the overall cost of the mortgage and the
borrower’s monthly payments are likely to be higher than they would otherwise have
been. Where borrowers are confident they can continue to meet their original
contractual mortgage payment, they should continue to do so.
1.9 We will update FG23/2 to reflect these new options as soon as possible.
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Who this affects
1.10 This policy statement applies to:
mortgage lenders and administrators
home purchase providers and administrators
1.11 It may also be of interest to:
industry groups and trade bodies
credit reference agencies
consumer groups
individual customers
Our rule-making powers
1.12 We are using general rule-making powers in section 137A of the Financial Services
and Market Act 2000 (FSMA) to introduce these sourcebook changes. We need to
make these changes now to reduce the likely consumer harm if we delayed
implementation by consulting. Under section 138L of FSMA, we are not required to
conduct a public consultation on rule changes if we consider the delay this would
involve would be prejudicial to the interest of consumers.
1.13 We are satisfied that this test is met, given the imminent expiry of many low fixed
rate mortgages, rising interest rates and continuing cost of living pressures. 893,000
fixed-rate deals expire this year alone, and rates have risen significantly across the
market. We recognise that signatories of the Mortgage Charter want to deliver
support quickly and we are therefore acting at pace to deliver the changes required
to support this. These measures are permissive, and making these changes now is
necessary to provide certainty and clarity for lenders wishing to further support their
borrowers, and for borrowers looking to know what options they may have when
making decisions about their mortgage.
How it links to our objectives
Consumer protection
1.14 The changes we are making will advance our objective to secure an appropriate
degree of protection for consumers by enabling lenders to offer their customers
swift, temporary reductions in payments and for customers to make an informed
choice on their options. Firms will need to ensure they give customers sufficient
information to support their decision to use one of these options, where it is offered.
What we are changing
1.15 We are introducing changes to our Handbook to enable firms to allow mortgage
borrowers to:
reduce their capital repayments (including to zero, and paying interest only) for
up to 6 months
fully or partly reverse a term extension within 6 months of extending the term
Lenders may now offer both these options without a new affordability assessment.
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Outcome we are seeking
1.16 The new options outlined in this statement will allow residential mortgage lenders to
offer all borrowers (except for second charge and bridging loan customers) a
temporary, contractual reduction in their monthly mortgage costs without an
affordability assessment. It thereby enables a key commitment made under the
Mortgage Charter.
1.17 We expect lenders to help borrowers to make informed choices when considering the
support they may need. Lenders should make clear the potential costs and risks of
changing a mortgage contract.
1.18 Borrowers taking up these options should be prepared for higher monthly payments
after the temporary period is over, and higher overall costs over the term of their
mortgage.
1.19 Where borrowers are confident they can continue to meet their original contractual
mortgage payment, they should continue to do so. This is because borrowers who do
not make changes to their mortgage payments will pay less interest overall.
Measuring success
1.20 As part of our supervision of firms, we will engage with them and request data to
assess how they are making use of these changes, and the outcomes for customers.
In due course we will consider whether any updates are required to firms’ regulatory
reporting.
Equality and diversity considerations
1.21 We have considered the equality and diversity issues that may arise from the
Handbook changes in this Policy Statement.
Overall, we do not consider the Handbook changes materially impact any of the
groups with protected characteristics under the Equality Act 2010. But we will
continue to consider the equality and diversity implications of the changes and will
revisit them as part of our review of the impact of the new rules.
Next steps
1.22 The rule changes take effect from 30 June 2023. Firms may begin using these
exemptions from that date.
1.23 We will review the impact of the rule changes within 12 months.
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2 Handbook changes
2.1 The purpose of these changes is to enable, as simply and clearly as possible, firms
that have signed up to the Government’s Mortgage Charter to deliver on the
commitments it contains. However, our approach does not limit the effect of our
changes to those firms alone. These changes will allow any authorised mortgage
lender to offer first charge residential mortgage borrowers the option to temporarily
reduce their contractual payments, without an affordability assessment (usually
required under MCOB 11.6.2R) or creating a payment shortfall, and to reverse a
recent extension to their mortgage term.
Variations to mortgage contracts
2.2 Lenders can use existing flexibility in our rules to allow borrowers to extend their
mortgage term up to retirement without assessing affordability. Previously, if the
borrower wanted to return to their original term, their lender would generally have
needed to assess if the increased monthly payment would be affordable before
proceeding. They will now be able to do so without an affordability assessment, as
long as the borrower decides to reverse the extension within 6 months of the term
extension having taken effect. This change also applies with respect to regulated
home purchase plans.
2.3 Lenders will also be able to offer borrowers a way to temporarily reduce their capital
payments, with the option of making interest-only payments for up to 6 months.
After this agreed period, they will be expected to resume full capital repayments,
including making up for the reduced payments over the remaining term of the
mortgage.
2.4 A borrower reducing their capital repayments or extending their term (even if they
later reduce it) will increase the overall cost of their mortgage. Their monthly
payments will also increase once the temporary interest-only period ends, and if they
revert to their original mortgage term.
2.5 These rules are exemptions from responsible lending requirements. They are not
mandatory, but any lender may use them, subject to the limitations set out below.
Lenders who have signed up to the Mortgage Charter may make use of them to fulfil
those commitments.
2.6 Our rule changes have not superseded or replaced any of the existing forbearance
options within MCOB 13. Lenders will still be expected to consider appropriate
forbearance arrangements for borrowers in financial difficulty. This is particularly the
case given the signatories’ commitment not to repossess within 12 months of a
missed payment except in exceptional circumstances. This commitment is in line with
the approach to repossessions in the Pre-action Protocol and MCOB 13 - namely that
lenders must not repossess the property unless all other reasonable attempts to
resolve the position have failed.
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Scope of the changes
2.7 These changes only apply to first charge residential mortgages and (for term
reductions) home purchase plans. They do not apply to bridging loans or second
charge mortgages. We have limited the effect of these changes because the
immediate concern, and scope of the Charter, has been the mainstream mortgage
market. We will consider the case for extending the rule changes beyond first charge
residential mortgages and home purchase plans (for example, second charge and
bridging loans) as part of our review.
Changes to enable term reduction
2.8 The change contained in MCOB 11.6.3R(3)(b) permits a lender to reverse a term
extension, within 6 months of it taking effect, either partially or to the original term
length. For example, where a borrower has 10 years remaining on their mortgage
and their lender allows them to extend the term to 15 years, if they choose to revert
back to the original mortgage term after 6 months, the remaining term of the
mortgage would be 9 years and 6 months. The ‘Example illustrations of impact of
changes’ below sets out how this may take effect.
2.9 New MCOB 11.6.3R(5) provides that a borrower cannot make repeat use of this
option. A borrower does not have to revert their term back to its original length if
they do not want to, but if they want to revert without an affordability test, this must
be done within 6 months of extending their term.
2.10 Where a borrower chooses not to revert their term to its original length, their
monthly payments will remain at the lower rate, with a higher overall cost across the
term of the mortgage. These borrowers are likely to still have options to reduce their
term if they want to. They may be able to make overpayments, which are likely to be
penalty-free as long as the overpayment is within any early repayment charge limits
on their mortgage. This would have the effect of reducing the term without an
affordability assessment being required, and would give them flexibility to increase
payments as and when their financial circumstances improve. Borrowers may also
reduce their term through another contract variation or new mortgage contract,
which would likely involve an affordability assessment.
2.11 As is currently the case, a term extending into (or further into) retirement is likely to
be material to affordability (see MCOB 11.6.4E), in which case an affordability
assessment would be required.
Changes to enable a temporary interest-only period
2.12 New MCOB 11.6.3R(3)(a) exempts lenders from the requirement to undertake an
affordability assessment for a contract variation which temporarily reduces the
capital repayments required under a repayment mortgage for no more than 6
months. Such a variation could reduce the capital repayments due for this period to
zero, meaning the borrower would be required to make payments of interest only.
This new flexibility will only be permitted if the mortgage remains on a repayment
basis (new MCOB 11.6.3R(4)). That is to say, it will only be possible if the borrower
will return to making payments of capital and interest following the temporary
reduction. Ultimately, the borrower will have to repay the whole capital balance
outstanding over the remainder of the term (unlike with permanent interest-only
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mortgages where the borrower repays the capital at the end of the mortgage term).
Typically, this will mean the borrower’s payments will be higher after the limited
interest-only period expires.
2.13 New MCOB 11.6.41R(4) also exempts this type of variation from the requirement to
assess whether the borrower has in place a credible and clearly understood strategy
for repaying the capital at the end of the mortgage term. This requirement is not
necessary as the mortgage will remain a repayment mortgage with the borrower
expected to make regular repayments of capital and interest (after the expiry of the
limited interest-only period). Given this exemption, other provisions which deal with
repayment strategies (such as MCOB 11.6.46E) naturally do not apply.
2.14 For clarity, these changes do not apply to a variation to an interest-only mortgage
followed by a second variation back to a repayment mortgage. They only apply to a
single variation which reduces capital payments for a temporary period, with full
repayment of capital required after this time. Under these changes no shortfall will
arise and no capitalisation will occur – payments of capital are simply reallocated
across the remaining term.
Example illustrations of impact of changes
The following illustrations show how using one of these new options would
affect a borrower with an outstanding balance of £100,000, paying interest of
6% and with 10 years remaining on their contract.
Reversal of term extension
Payments before extension: £1110
Payments following 10-year term extension: £716
Payments following reversal of extension after 6 months: £1138
This borrower defers approximately £2400 over the 6 months their term was
extended, which still remains payable once their term reverts. Assuming their
interest rate remains at 6% for the remainder of their term, they will pay
around £800 more overall than if they had kept their term constant.
Temporary interest-only
Payments before temporarily paying interest-only: £1110
Payments while temporarily paying interest-only: £500
Payments after end of temporarily paying interest-only: £1153
This borrower defers approximately £3720 over the 6 months of the interest-
only period, which as above remains payable over the rest of their term.
Assuming their interest rate remains at 6% for the remainder of their term,
they will pay around £1200 more overall than if they had continued to make
capital payments.
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T
emporary interest-only combined with term extension
In this example we assume that the borrower agrees with their lender a term
extension of 6 months as well as a temporary switch to interest-only, to avoid
an increase in monthly payments following the change.
Payments before temporarily paying interest only: £1110
Payments while temporarily paying interest only: £500
Payments after temporarily paying interest only: £1110
This borrower defers around £3720 over the 6 months of the interest-only
period, which still remains payable over the rest of their term. Assuming their
interest rate remains at 6% for the remainder of their term, they will pay
around £3000 more overall than if they had continued to make capital
payments and not extended their term.
Disclosure to customers
2.15 Before agreeing either option, firms will need to give borrowers a personalised
disclosure outlining the specific changes to the borrower’s amounts due, including
where it is known that the payment will change, the new payment and the date of
the change in accordance with existing rules (MCOB 7.6.28R). Firms will also need to
meet expectations set under the Consumer Duty’s ‘consumer understanding’
outcome. Firms will need to make sure customers understand the features, costs,
and benefits of the option they choose, before the change takes effect.
2.16 Where a customer is considering a temporary interest-only period, firms will need to
disclose both the initial reduced payment amount and what the subsequent higher
payments will be when the contract reverts to a full repayment basis.
2.17 We do not consider that MCOB 7.6.28R(5) applies to the new rule for temporary
interest-only. This is because, for the purposes of MCOB 7, a temporary switch to
interest-only does not convert the contract type of the mortgage to interest-only.
This means it remains a repayment mortgage contract and this provision would not
apply.
2.18 Similarly, we do not consider MCOB 7.6.28AR relevant where firms reallocate the
payments rather than creating a payment shortfall, as there would be no
capitalisation of any sums due.
Execution-only sales
2.19 To meet the commitments in the Government’s Mortgage Charter, we anticipate that
firms will offer these contractual variations on an execution-only basis, and that they
will use digital tools where possible.
2.20 Execution-only contract variations are permissible under our rules (MCOB 4.8A.10R).
This is provided they do not involve additional borrowing and, where the change
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includes a rate switch, the customer is presented (via a non-interactive channel) with
all products offered by the firm for which the customer is eligible.
2.21 In such a case, borrowers will not receive advice on the suitability of these changes
with respect to their personal circumstances. Instead, personalised disclosure
(complying with the requirements set out above) should ensure customers can make
informed choices.
Consumer Duty
2.22 When offering these new options, our Consumer Duty will apply. For new and
existing products or services that are open to sale or renewal, the Consumer Duty
will come into force on 31 July 2023. For closed products or services, the Duty will
apply from 31 July 2024.
2.23 The Consumer Principle, Principle 12, requires firms to ‘act to deliver good outcomes
for retail customers’.
2.24 Principles 6 and 7, and customer’s best interests (MCOB 2.5A.1R) apply to all firms
and products, including closed mortgage books.
2.25 We want firms to support their borrowers make informed decisions about financial
products and services. When offering these new options, firms must aid their
customers understanding of them, in addition to any other options they may also
provide. Firms should present information in a way that properly explains the
benefits and risks, and prominently highlights the key costs that may be incurred.
2.26 Firms should make clear to borrowers seeking to use these options:
the potential costs and risks associated with them
that their affordability for the new payment schedule has not been assessed
if the borrower can meet their current payments they should continue to do so
2.27 Firms must avoid causing foreseeable harm to customers. The firm should take steps
to ensure that customers understand the risks and consequences of their choices.
Even where firms act reasonably to meet the Duty, consumers may sometimes make
poor decisions. If a customer insists on a course of action that the firm regards as
harmful, they are not obliged to prevent it.
Exit from temporary interest-only period
2.28 Borrowers who cannot afford their current monthly payments and temporarily switch
to interest-only may be unable to afford payments at an increased level after the 6-
month period. Lenders should ensure they are ready to provide appropriate support
to borrowers in this position.
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Annex 1 Abbreviations used in this paper
CEO Chief Executive Officer
FCA Financial Conduct Authority
FSMA Financial Services and Markets Act 2000
MCOB Mortgages and Home Finance: Conduct of Business
TSG Tailored Support Guidance
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Annex 2 Compatibility statement
Compliance with legal requirements
1. This Annex records the FCA’s compliance with a number of legal requirements
applicable to the proposals in this consultation, including an explanation of the FCA’s
reasons for concluding that our proposals in this consultation are compatible with
certain requirements under the Financial Services and Markets Act 2000 (FSMA).
2. When making rules, the FCA is required by section 1B(1) FSMA, so far as reasonably
possible, to act in a way which is compatible with its strategic objective and
advances one or more of its operational objectives, and (b) its general duty under s.
1B(5)(a) FSMA to have regard to the regulatory principles in s. 3B FSMA. The FCA
must also consider whether rules will have a significantly different impact on mutual
societies as opposed to other authorised persons.
3. This Annex also sets out the FCA’s view of how the proposed rules are compatible
with the duty on the FCA to discharge its general functions (which include rule-
making) in a way which promotes effective competition in the interests of consumers
(s. 1B(4)). This duty applies in so far as promoting competition is compatible with
advancing the FCA’s consumer protection and/or integrity objectives.
4. In addition, this Annex explains how we have considered the recommendations made
by the Treasury under s. 1JA FSMA about aspects of the economic policy of His
Majesty’s Government to which we should have regard in connection with our
general duties.
The FCA’s objectives and regulatory principles: Compatibility
statement
5. The rules described in this statement are primarily intended to advance the FCA’s
operational objective of consumer protection. They are also relevant to the FCA’s
market integrity objective.
6. We have had regard to each of the 8 matters listed in s.1C(2)(a)-(h) in FSMA.
Provided that those lenders who choose to use the options outlined above
communicate the risks and implications of these effectively to their borrowers,
including through the required disclosure and in line with the Consumer Duty,
consumers are likely to be able to make their own judgement on what options, if
any, they need. We understand that there are differing degrees of understanding
from consumers, and that they must take responsibility for their decisions. We
believe the changes set out do not change this.
7. We consider these proposals are compatible with the FCA’s strategic objective of
ensuring that the relevant markets function well because the changes are permissive
but will allow lenders to offer swift temporary reductions in their monthly payments
and customers to make an informed choice on their options. Lenders can still form
their own risk appetite and decide what options and support to offer customers – our
rules provide an exemption from certain tests where this can help borrowers. For the
purposes of the FCA’s strategic objective, ‘relevant markets’ are defined by s. 1F
FSMA.
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The need to use our resources in the most efficient and economic way
8. We have considered our approach as the most efficient and economic way of fulfilling
our commitment to support the implementation of the Mortgage Charter. If we did
not adopt this approach, the alternative option of a series of waivers and
modification of rules would be more resource-intensive and less efficient.
The principle that a burden or restriction should be proportionate to the
benefits
9. We have not imposed any new requirements on firms, any additional burden is up at
their discretion. We have also taken into account the importance of appropriate
disclosure to enable informed customer decisions. Where firms choose to offer the
support made available through our changes, it can be beneficial for consumers, as
outlined above.
The desirability of sustainable growth in the economy of the United
Kingdom in the medium or long term
10. We have had regard to this principle and do not believe that our measures
undermine it.
The general principle that consumers should take responsibility for their
decisions
11. We have had regard to this principle and do not believe that our measures
undermine it. Signatory firms will be expected to provide the appropriate information
to consumers about the support they may want, and a consumer must still take
responsibility for the option they choose.
The responsibilities of senior management
12. We have had regard to this principle and do not believe that our measures
undermine it.
The desirability of recognising differences in the nature of, and objectives
of, businesses carried on by different persons including mutual societies and
other kinds of business organisation
We have had regard to this principle and do not believe that our measures
undermine it.
The desirability of publishing information relating to persons subject to
requirements imposed under FSMA, or requiring them to publish information
13. We have had regard to this principle and do not believe that our measures
undermine it.
The principle that we should exercise of our functions as transparently as
possible
14. Rules made using s137L, without prior consultation or full cost benefit analysis do
not undergo the usual process of testing draft rules and receiving feedback from the
public before they are made. However, in the context of moving to swiftly introduce
rule changes to support the Mortgage Charter we have sought to be as transparent
through the publication of this Policy Statement. As set out in the Policy Statement,
we felt delay would be prejudicial to the interests of consumers.
15. We have consulted industry representatives, HM Treasury and the Prudential
Regulation Authority on our changes, to mitigate against unintended consequences.
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16. In formulating these measures, the FCA has had regard to the importance of taking
action intended to minimise the extent to which it is possible for a business carried
on (i) by an authorised person or a recognised investment exchange; or (ii) in
contravention of the general prohibition, to be used for a purpose connected with
financial crime (as required by s. 1B(5)(b) FSMA).
Expected effect on mutual societies
17. The FCA does not expect the proposals in this paper to have a significantly different
impact on mutual societies.
Compatibility with the duty to promote effective competition
in the interests of consumers
18. We consider our rules to be consistent with the FCA’s duty to promote effective
competition in the interests of consumers.
Equality and diversity
19. We are required under the Equality Act 2010 in exercising our functions to ‘have due
regard’ to the need to eliminate discrimination, harassment, victimisation and any
other conduct prohibited by or under the Act, advance equality of opportunity
between persons who share a relevant protected characteristic and those who do
not, to and foster good relations between people who share a protected
characteristic and those who do not.
As part of this, we ensure the equality and diversity implications of any new policy
proposals are considered. The outcome of our consideration in relation to these
matters in this case is stated in paragraph [1.20] of the Policy Statement.
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Appendix 1 Made rules (legal instrument)
14
FCA 2023/29
MORTGAGE AFFORDABILTY RULES (AMENDMENT) INSTRUMENT 2023
Powers exercised
A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise
of the following powers and related provisions in the Financial Services and Markets
Act 2000 (“the Act”):
(1) section 137A (General rule-making power); and
(2) section 137T (General supplementary powers).
B. The rule-making provisions listed above are specified for the purposes of section
138G(2) (Rule-making instruments) of the Act.
Commencement
C. This instrument comes into force on 30 June 2023.
Amendments to the Handbook
D. The Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) is
amended in accordance with the Annex to this instrument.
Citation
E. This instrument may be cited as the Mortgage Affordability Rules (Amendment)
Instrument 2023.
By order of the Board
29 June 2023
FCA 2023/29
Page 2 of 3
Annex
Amendments to the Mortgages and Home Finance: Conduct of Business sourcebook
(MCOB)
In this Annex, underlining indicates new text and striking through indicates deleted text.
11
Responsible lending, and responsible financing of home purchase plans
…
11.6
Responsible lending and financing
…
The assessment of affordability
…
11.6.3
R
…
(3)
MCOB 11.6.2R does not apply to a variation to the terms of a
regulated mortgage contract or home purchase plan which:
(a)
reduces (including to zero) the capital repayments required
under a repayment mortgage for a period of no longer than
six months;
(b)
reverses (in full or in part) a term extension within six
months of it taking effect; or
(c)
is made solely for the purposes of forbearance where the
customer has a payment shortfall, or in order to avoid a
payment shortfall.
(4)
Paragraph (3)(a) only applies where the contract:
(a)
remains a repayment mortgage after the variation (because
the mortgage is still designed to be repaid in full over its
term);
(b)
has not previously been varied in reliance on that paragraph;
and
(c)
is not a bridging loan or a second charge regulated
mortgage contract.
(5)
Paragraph (3)(b) only applies where the contract:
FCA 2023/29
Page 3 of 3
(a)
has not previously been varied in reliance on that paragraph;
and
(b)
is not a bridging loan or a second charge regulated
mortgage contract.
…
Entering into interest-only mortgages
11.6.41
R
(1)
A mortgage lender may only enter into an interest-only mortgage,
or switch a repayment mortgage onto an interest-only basis for all
or part of its term, if:
…
(4)
Paragraph (1) does not apply in respect of a variation to the terms
of a regulated mortgage contract made in accordance with MCOB
11.6.3R(3)(a).
…
© Financial Conduct Authority 2023
12 Endeavour Square London E20 1JN
Telephone: +44 (0)20 7066 1000
Website: www.fca.org.uk
All rights reserved
Pub ref: 008097
