FCA calls for more flexibility in mortgage market

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FCA calls for more flexibility in mortgage market

The mortgage market needs more flexibility to help young people onto the property ladder, the Financial Conduct Authority has stated.

In its discussion paper on intergenerational differences, published yesterday (May 2), the regulator stated the working ways of ‘millennials’ — those between 23 and 38 years old — meant fewer young people were able to prove to lenders that they could afford a mortgage policy.

It said those with less reliable and stable sources of income, such as self-employment, zero-hour contracts or agency work, found it harder to pass standard affordability assessments.

The FCA also pointed out that there was more movement between the workplace and further education as young people tended to join the labour market, go back into education, then enter the labour market again later.

This required greater flexibility in the mortgage space, the City watchdog stated.

The FCA also noted that a steep rise in house prices compared to wages had stifled the younger generation’s ability to buy a house.

According to the ONS, house prices in real terms have increased by 259 per cent in the past 30 years, compared to a 68 per cent rise in wages.

The FCA stated schemes such as Help-to-Buy had gone some way to help young people meet the cost but stressed many other consumers turned to the ‘bank of mum and dad’ or other family members, such as grandparents, to raise the funds.

Last week, a House of Lords committee stated younger generations needed more support from older generations to afford property than ever before and urged the watchdog to ensure the market allowed for innovation.

In today’s report, the FCA encouraged more innovation in later life lending so older generations can benefit from products that meet their needs to maintain living standards once retired as well as provide younger family members to purchase a house.

But there could be commercial barriers to innovation in the later life market, it stated.

Equity release providers lend out substantial amounts over very long terms and the repayments generally only take place when the person dies or moves into care, requiring lenders to have long-term funding models.

The FCA has asked consumers, providers and advisers to give feedback on whether there are further intergenerational issues facing the mortgage market, whether the industry is currently meeting changing customer needs and if not, why not. 

Rachael Griffin, tax and financial planning expert at Quilter, said it the paper was a landmark moment in the debate around intergenerational wealth inequality. 

She said: "The FCA has marked the financial divide between millennials, baby boomers, and generation X as one of its key priorities and is now putting concerted effort into delivering on that priority.

"This is the first time in recent memory the authority has placed intergenerational issues front and centre of its plans and challenged the industry to do more on this issue.

"The real question is that having acknowledged these challenges, what can the FCA and the financial services industry do about it?"

Ms Griffin said the financial challenges of younger generations were the by-product of an enormous range of factors – low interest rates, flat wage inflation, rising house prices, the student debt burden, and the hangover of the financial crisis.

She said: "The mortgage market is an obvious candidate for creating a practical plan. The question now is whether regulation of the mortgage market can be reformed to unlock lending for those that need it, both when they are trying to get on the ladder, but also when they want to release equity in their home in later life."

Dave Harris, chief executive at equity release lender more 2 life, said: "In recent years, we have seen wealth transfer between generations playing an increasingly important role in boosting the finances of young people, whether it is to help them buy their first property, pay off student debt, or even help afford their wedding. 

"Last autumn, the Equity Release Council revealed more than 1.1m homeowners used equity release to help their younger relatives buy their first home. However, as the FCA notes, one of the key factors to continued growth and diversification of the equity release market will be finding a greater variety of funding for lenders to help stimulate further product innovation.

"A wider range of funding like this will not only drive product innovation but as result will lead to increased competition and ultimately, flexibility of choice for consumers."

imogen.tew@ft.com