CP26/18: Mortgage Rule Review

CP26/18 — Key Takeaways | June 2026

The FCA has published CP26/18, a consultation paper on its Mortgage Rule Review focused on supporting first-time buyers and underserved consumers. The consultation closes on 28 July 2026, with a policy statement expected in the latter half of this year.

Why now?

The mortgage market, saving habits and employment patterns have changed significantly over the past decade. Lending standards have strengthened considerably since the early 2000s, with more than 99% of mortgages originated since 2014 performing as expected. However, house prices have risen far faster than wages, while borrowers’ needs, particularly those of first-time buyers, continue to evolve.

The FCA considers that some creditworthy consumers may not currently be well served by the market and is proposing changes in six areas: interest-only mortgages, retirement interest-only mortgages, borrowers with variable or irregular income, credit-impaired borrowers, foreign currency loans and bridging loans.

In developing these proposals, the FCA has taken account of past periods in which certain mortgage products were sold widely under weaker underwriting and distribution standards. The responsible lending framework and the Consumer Duty remain central to its approach. While all forms of home ownership involve risk, the FCA considers that wider access to mortgage lending can deliver broader financial and social benefits – it is a case of balancing risk appropriately and this is acknowledged by the FCA.

Importantly, the proposals are permissive: firms may adopt them where appropriate, but are not required to change their existing policies.

Interest-Only Mortgages: A Targeted Reopening

Since 2013, interest-only products of any kind have accounted for less than 0.5% of sales to first-time buyers. The FCA views this as disproportionate and considers that interest-only, or part interest-only/part repayment, lending could help some first-time buyers access home ownership.

The FCA proposes three changes to the interest-only framework:

1. New thresholds for credible repayment strategies: Where the interest-only element is below 25% of the lender’s valuation, the FCA proposes removing the requirement for a credible repayment strategy. Between 25% and 50%, the requirement to assess whether the property would provide enough equity to buy a cheaper property would be removed. Above 50%, the existing rules would continue to apply.

2. New repayment strategy options: The FCA proposes adding follow-on mortgage products, such as retirement interest-only and lifetime mortgages, and conversion to repayment within a reasonable period as examples of credible repayment strategies.

3. Tailored interactive dialogue: Where evidence of a credible repayment strategy is not reasonably available or obtainable, a lender could instead make a reasonable assessment through a tailored interactive dialogue with the borrower. This would be a notable shift from the current evidence-based approach and could improve access for first-time buyers who cannot yet provide investment statements or asset valuations.

Retirement Interest-Only Mortgages: Removing the Joint Affordability Barrier

The FCA proposes removing guidance in MCOB 11.6.15G(4) that requires lenders to assess whether a surviving spouse or civil partner could afford the mortgage alone. Firms have told the FCA that this guidance is overly restrictive and can unnecessarily prevent consumers from accessing RIO products.

Sales of retirement interest-only mortgages remain low: 3,002 in 2025, compared with 26,974 lifetime mortgages and nearly 395,000 standard mortgages for borrowers aged 55 and over. Arrears on RIO mortgages are also very low, at less than 1%.

The FCA expects that removing this guidance could reduce the number of consumers taking out lifetime mortgages — and being impacted with the associated equity erosion — where a retirement interest-only mortgage may be more suitable.

Variable and Irregular Income: Accommodating the Modern Workforce

Around 6% of mortgage sales include at least one self-employed borrower, compared with approximately 13% of the workforce who are self-employed. The FCA wants to narrow this gap.

The FCA proposes replacing references to “monthly payments” in relevant parts of the Handbook with “regular contractual payments”, making clear that lenders may agree quarterly or other non-monthly payment schedules. It also supports the use of alternative data, including Open Banking, to build a fuller picture of borrower affordability.

If industry innovation does not meet legitimate demand, the FCA may consider a more directive approach in future.

Credit-Impaired Customers: Tackling its broad use

The FCA’s glossary definition of a “credit-impaired customer” was developed for reporting purposes and for a specific affordability rule on debt consolidation mortgages. However, some firms appear to be applying it more broadly, including where the borrower has since recovered and the loan is not for debt consolidation.

The impact is material: in 2025, the median rate on credit-impaired mortgage sales was 6.44%, compared with 4.33% for non-impaired sales.

The FCA proposes making clear that the definition applies only to debt consolidation affordability under MCOB 11.6.16R and regulatory reporting under SUP 16.12. Firms remain free to set their own credit risk appetite, but should not treat the glossary definition as evidence that a borrower is unaffordable.

Foreign Currency Loans: Removing EU-derived frictions

The FCA proposes distinguishing between loans denominated in a foreign currency and loans where all or part of the borrower’s income is in a non-sterling currency. Stakeholders have described the current Mortgage Credit Directive-derived rules as disproportionate and operationally complex, discouraging some lenders from offering products or accepting foreign income.

For non-sterling loans, lenders may no longer be required to offer a currency conversion right, and the prescriptive 20% exchange-rate notification trigger would be replaced by a Consumer Duty-based assessment. For sterling loans with foreign income, no currency monitoring or exchange-rate warnings would be required.

Doubling the Term of Bridging Loans

The FCA proposes extending the maximum regulated bridging loan term from 12 to 24 months, including extensions. Around 19% of consumers with specialist bridging lenders have already extended beyond 12 months, and 6.7% re-bridged within six months of their first loan ending, incurring unnecessary fees and potential credit file impacts.

The FCA also proposes removing the requirement to reassess affordability when extending a non-interest-roll-up bridging loan, because the original assessment would have been completed within the previous 12 months.

What’s next?

The FCA invites feedback by 28 July 2026 and aims to publish a policy statement later this year.

The FCA is also continuing policy development on the remaining Mortgage Rule Review themes: enhancing later-life lending, enabling innovation and protecting consumers in vulnerable circumstances.

For lenders and intermediaries, the proposals create an opportunity to serve a wider range of creditworthy borrowers. Although the changes are permissive, firms that adapt their products, systems and underwriting early may be best placed to meet demand from currently underserved segments of the market.

If you would like to discuss the issues raised in this briefing or the implications for your firm, please get in touch with our team.