The regulator will treat retirement interest-only mortgages as standard mortgages rather than under equity release standards.
The Financial Conduct Authority has removed a regulatory barrier to allow ‘retirement interest-only mortgages’ for older consumers, in which the loan would only be repaid on a specified life event such as the customer’s death or move into residential care.
After setting out plans to reintroduce the product last year, the FCA has said retirement interest-only mortgages will now be excluded from the definition of a lifetime mortgage.
As well as redefining the product, the watchdog will restrict the sale of them to borrowers above a certain age.
The FCA said: "We envisage retirement interest-only mortgages as an additional option alongside downsizing or equity release, not just as a solution for customers with maturing interest-only mortgages.
"A retirement interest-only mortgage will not be the default option for customers with maturing interest-only mortgages and, as with all lending, the decision to offer these mortgages will be a commercial judgement."
The regulator said the changes will improve access to borrowing for older homeowners who have reliable retirement incomes and would benefit some of those "with maturing interest-only mortgages who do not have sufficient funds to fully repay" the loan.
Jackie Bennett, director of mortgages at UK Finance, said: "The reclassification of retirement interest-only mortgages will offer homeowners in later life an alternative option, alongside equity release, for those who wish to stay in their homes.
"It’s useful that the FCA has clarified what information will need to be disclosed to customers so they are fully informed and provided further details on how lenders will need to carry out an affordability assessment."
The FCA received 41 responses to the consultation paper, including 13 from individual consumers, and said feedback had been "generally supportive".
David Hollingworth, a director at London & Country, said: "This recognises the fact that older borrowers can, in some cases, want or need access to a standard mortgage that will run into later life.
"This could offer a viable alternative for some borrowers alongside the alternatives such as equity release. We will have to see how lenders fare in funding this type of open-ended product but it at least signals an understanding that older borrowers can justifiably take on a mortgage in later life, which should help lenders shape their policy."