Mortgage rules shake up – for interest-only mortgages and the self-employed

An overhaul of how interest-only mortgages and other lending criteria work has been proposed by the Financial Conduct Authority. A new consultation paper into the FCA mortgage rules proposes a raft of changes to make it easier for first time buyers, older borrowers and the self-employed to get a mortgage.

Interest Only Mortgage Proposals

Its proposals around interest-only mortgages and part-and-part mortgages, include:

• Not requiring borrowers to have a credible repayment strategy where the interest-only part of the mortgage is less than 25% of the mortgage valuation.
• Not needing borrowers to demonstrate enough potential equity to buy a cheaper home if the interest-only amount is 25%-50% of the valuation. 
• When a credible repayment strategy is needed, the lender must have evidence that the borrower has one. If this is not available, the lender should make a “reasonable assessment” to show the borrower has a clearly understood credible repayment strategy.

The FCA said the sale of the main property was the most used credible repayment strategy, but lenders do not currently consider whether the sale would allow for the purchase of a cheaper home, so it was considering introducing this measure. 

The regulator has also proposed other types of credible repayment strategies, such as using follow-on mortgages, like retirement interest-only (RIO) and lifetime mortgages, and transitioning to a repayment mortgage within a reasonable period. 

It said that while a credible repayment strategy protects both borrowers and lenders, it wants lenders to consider more strategies, adding that current practices could be difficult for some borrowers, particularly first-time buyers, as they may not be able to give evidence of a credible repayment plan. 

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How interest-only mortgages work

• With interest-only mortgages, you only pay the interest on the loan each month. You then pay the original amount you borrowed in a lump sum at the end of the term.

• Before the 2008 financial crisis, interest-only lending soared, with borrowers able to take out this type of mortgage without showing how the debt would be paid off.
• After the crash, mortgage lenders tightened the lending criteria around interest-only mortgages, with lenders usually requiring a large deposit and an approved repayment vehicle in place.

• In terms of how widely available interest-only mortgages would become under these FCA proposals, the consultation document said: “We believe that interest-only and part interest-only/part repayment lending could support some FTBs (first-time buyers) in getting on the property ladder, however the changes we are proposing are targeted, and would not make interest-only mortgages universally accessible.”

First Time Buyer & Self Employed Proposals

Other proposed measures in the FCA Mortgage Rules Review – Supporting First Time Buyers and Underserved Consumers consultation include:

• Reducing barriers for lenders to offer flexible repayments for people with variable income, like the self-employed.
• Encouraging lenders to assess affordability based on a person’s full and current situation, rather than automatically excluding someone due to minor or past credit history issues.
• Making it easier for older homeowners to unlock wealth built up in their property by updating affordability guidance for retirement interest-only mortgages.

David Geale, executive director for payments and digital finance at the FCA, said: “We’re living longer and how many people work has changed. Our mortgage rules need to keep pace so those who can afford to repay can borrow. Stronger protections mean we can now safely widen access to mortgage borrowing for those that may be underserved.”

The consultation ends on 28 July 2026. Read the consultation document here and share your views.

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