The Mortgage Market Review and today's affordability rules

The Mortgage Market Review (MMR) was the Financial Conduct Authority's overhaul of mortgage lending rules, in force since 26 April 2014. It changed what a lender must do before agreeing a mortgage: verify your income with independent evidence, assess whether you can afford the repayments by looking at your spending as well as your earnings, stress-test the loan against a rise in interest rates, and, on an interest-only mortgage, check that you have a credible plan to repay the capital at the end¹.

The rules were a response to lending before the financial crisis, when self-certified mortgages let borrowers state their income without proof. The FCA estimated at the time that around 2.5% of borrowers would either be excluded from the market or able to borrow less under the new rules in subdued market conditions, rising to around 11.3% in a boom period scenario¹. A later Bank of England analysis of the related affordability test estimated it could have caused around 6% of borrowers, roughly 30,000 per year, to take out smaller mortgages³.

The rules still govern every regulated mortgage application today, and they explain much of what borrowers find when they apply: the demand for payslips and bank statements, the questioning about childcare and spending, and the difficulty some existing borrowers face when trying to switch lender. Later changes, including the Mortgage Credit Directive in 2015, the Mortgage Charter from 2023 and limited FCA exemptions from April 2024, have adjusted the edges of the regime without replacing it.

What the Mortgage Market Review changed for borrowers

Before the MMR, a lender could agree a mortgage largely on the strength of what the borrower declared about their income. The review replaced that with a set of duties the FCA summarised as including "a ban on self-certified mortgages, requiring instead that income is verified in all cases"¹. It also brought in the affordability assessment, the interest rate stress test and the interest-only repayment plan rules, each covered in its own section below.

The FCA's own estimates of the impact were modest but real. In subdued market conditions it estimated around 2.5% of borrowers would either be excluded from the market or able to borrow less; in a boom period scenario it estimated around 11.3% of borrowers would be impacted¹. The Bank of England later estimated that the affordability test it had recommended alongside the MMR could have caused around 6% of borrowers, roughly 30,000 per year, to take out smaller mortgages³.

One lasting side effect has been the group known as mortgage prisoners. The FCA's Mortgages Market Study found that some borrowers face barriers to switching and are paying more than they need to, despite some being up-to-date on their mortgage payments⁷. For most of these borrowers the cause is the changes in affordability rules following the financial crisis: they took out loans under the old rules, often with lenders that have since left the market or been taken over, and cannot pass the new affordability assessment even though they have kept up payments⁸. In 2020 the FCA amended its responsible lending rules so that lenders can choose not to undertake a standard affordability assessment, or to use a modified affordability assessment, for borrowers in closed mortgage books switching within the same group⁷. The modified assessment is available to a borrower who is looking to switch to a new mortgage deal on their current property, among other conditions⁸. Inactive lenders and unregulated firms had to inform their mortgage-holders of these possibilities⁹.

The wider context matters when reading these rules. The FCA has regulated mortgages taken out since 31 October 2004, and also deals with problems with existing mortgages¹⁰. Since 2023 the Mortgage Charter has provided additional flexibilities to help borrowers manage their transition to higher rates, with signatory lenders representing approximately 90% of the mortgage market⁵. The government states that the UK's mortgage market remains resilient, open and competitive across all major product types and segments, and that significant protections remain in place for anyone worried about their mortgage payments¹⁴.

The affordability check: income, spending and proof

The core rule is that a firm must assess whether the customer, and any guarantor, will be able to pay the sums due before entering into or agreeing to vary a regulated mortgage contract, and must not enter into the transaction unless it can demonstrate it is affordable². The firm must take full account of the customer's income, net of income tax and national insurance, and as a minimum the customer's committed expenditure and the basic essential expenditure and basic quality-of-living costs of the customer's household².

In practice this is why applications now involve payslips, tax returns for the self-employed, bank statements and questions about childcare, loans and regular spending. The lender must also put in place a written policy, approved by its governing body, setting out the factors it will take into account, and must review compliance with that policy at least once per calendar year². Firms must also have robust systems and controls, including management information and key performance indicators, to monitor the effectiveness of their affordability assessments, including in preventing payment difficulties².

Two refinements sit alongside the main rule. For high net worth mortgage customers, the assessment must take account, in general terms as a minimum, of the basic essential expenditure and basic quality-of-living costs of the customer's household, a lighter touch than the full committed expenditure analysis¹⁵. And where a purpose of the contract is debt consolidation and the customer is credit-impaired, the firm must take reasonable steps to ensure that on completion the debts are actually repaid, unless they are included as committed expenditure in the affordability assessment².

The assessment is not a formality that always ends in a smaller loan. In a Financial Ombudsman case study, the income and spending assessment carried out by the lender that had advised a customer showed that she could have afforded a repayment mortgage; the complaint turned on what options she was told about, not on whether the sums worked¹⁶. The affordability check sets the framework for the conversation; the advice rules, covered below, govern what a borrower is told.

Income must be proved: no more self-certified mortgages

The single clearest change the MMR made was to income verification. The rules state that a firm must obtain evidence of the income declared by the customer and must not accept self-certification of income; the source of evidence must be independent of the customer². The FCA described this as "a ban on self-certified mortgages, requiring instead that income is verified in all cases"¹.

Before 2014, self-certified mortgages allowed borrowers, particularly the self-employed, to state an income without documentary proof. That route is closed. A self-employed applicant now needs evidence from sources independent of themselves, such as HMRC records or accountant's documents, in the same way an employee needs payslips.

The consequence for anyone turned down under these rules is visible in the FCA's Financial Lives survey. Of UK adults who were declined a regulated credit agreement, 58% ended up paying a higher interest rate with an alternative lender or a different product, and 23% ended up borrowing less¹⁷. Being declined a mortgage under the affordability rules does not end access to credit altogether, but the alternatives can cost more.

The interest rate stress test: a rise of at least 1% over five years

The MMR requires a lender to consider likely future interest rates over a minimum period of five years from the expected start of the term, unless the interest rate is fixed for five years or more, or for the duration of the contract if that is less than five years². Within that, the lender must assume that interest rates will rise by a minimum of 1% over the first five years of the contract, even if the basis used indicates rates are likely to fall or rise by less than 1%².

This is the stress test borrowers meet when a lender assesses them at a higher rate than the one they will actually pay. Its purpose is to check that the loan remains affordable if rates rise, not to predict them. The government has recognised that families and businesses are worried about the impact of rising mortgage rates in response to recent volatility in global markets, particularly those coming to the end of a fixed rate deal¹⁴, which is the situation the stress test is designed to anticipate.

A separate, stricter test once sat on top of this. The Bank of England's Financial Policy Committee had recommended an affordability test of its own, and in 2022 the Bank published its recommendation that this be withdrawn; the FCA's MMR stress test, the 1% minimum rise described above, remained in place³. The Bank's analysis estimated the withdrawn test could have caused around 6% of borrowers, roughly 30,000 per year, to take out smaller mortgages³.

Interest-only mortgages need a credible repayment plan

With an interest-only mortgage, monthly repayments just cover the interest on the mortgage, with the capital paid off at the end of the term in one go¹⁸. That final lump sum is the risk the MMR rules address. A mortgage lender may only enter into an interest-only mortgage, or switch a repayment mortgage onto an interest-only basis, if it has evidence of a clearly understood and credible repayment strategy with the potential to repay the capital borrowed and any interest reasonably expected to be accrued⁴. A reference to an interest-only mortgage is to be read as including any regulated mortgage contract which includes an interest-only period, or where part of the sum is advanced on an interest-only basis².

Acceptable repayment strategies for many residential interest-only mortgages include a savings plan, an investment portfolio, a pension or other assets you plan to sell¹⁹. The lender must not accept speculative repayment strategies²⁰. The offer documents must include a statement reminding the customer to check regularly the performance of any investment used as a repayment strategy, to see whether it is likely to be adequate to repay the capital and, where applicable, the interest accrued at the end of the term²¹.

For interest-only mortgages entered into on or after 26 April 2014, the lender must carry out a review, as a minimum once during the term of the mortgage, in which contact is made with the customer, to check that the repayment strategy is still in place and still has the potential to repay the capital borrowed and interest⁴. Older interest-only mortgages, taken out before that date, do not carry the same review requirement, which is why many borrowers on legacy interest-only loans are advised to check their own plan.

There is a distinct product for older borrowers: a retirement interest-only mortgage is an interest-only mortgage which requires the interest to be repaid in full over the stated term, entry into which is restricted to older customers above a specified age, and under which the lender is not entitled to seek full repayment of the loan until the occurrence of one or more specified life events, unless the customer breaches their contractual obligations²². If you think you were mis-sold an interest-only mortgage, for example if the broker did not explain that you would only pay interest each month, or did not ask how you would repay at the end of the term, you can write a letter of complaint, first to the firm and then to the Financial Ombudsman¹⁹.

Which repayment plans lenders accept and which they refuse

The rules draw a line between plans that are evidence-based and plans that are speculative. A lender must not accept speculative repayment strategies²⁰. What counts as speculative is not exhaustively defined, but the contrast with the accepted list is clear: a savings plan, an investment portfolio, a pension or other assets you plan to sell can be acceptable for many residential interest-only mortgages¹⁹, while a hope that something will turn up, or an assumption of future windfalls, is not.

The lender's own judgement matters. It must have evidence of a strategy that is clearly understood and credible, with the potential to repay the capital and any interest reasonably expected to accrue⁴. In the Ombudsman case study mentioned above, the complaint concerned a borrower who had not been given repayment options despite an assessment showing she could afford a repayment mortgage¹⁶; the Ombudsman's role in these disputes is to look at what the lender or adviser did and whether it was fair in the circumstances.

Buy-to-let is different again. The rules on buy-to-let interest-only mortgages are less strict, because interest-only borrowing is standard for these purchases¹⁹. The Bank of England has projected the average increase in monthly repayments on buy-to-let mortgages by the end of 2025 to be around £275²³, a reminder that looser rules do not mean lower risk for the borrower.

When affordability is checked again: switching deals and changing your mortgage

The affordability rules are not only applied when you first buy. A firm must assess affordability before entering into, or agreeing to vary, a regulated mortgage contract². That single word "vary" is why changing your mortgage can bring the whole assessment back.

The Mortgage Charter softened this for straightforward switches. Customers who are up-to-date with payments can switch to a new mortgage deal with their lender at the end of their existing fixed-rate agreement without a new affordability check⁵. The commitment applies to 97% of the mortgage market, where customers are up to date with payments and not seeking to borrow more or change their repayment type or term⁵. The average homeowner re-mortgaging over the twelve months to mid-2023 had around a 50% loan-to-value ratio, so for many this switch is a low-risk proposition for the lender²⁴. Over three quarters of borrowers switch within 6 months of the end of an introductory deal²⁵, so this commitment covers the most common remortgage in the market.

In April 2024 the FCA added two new, limited exemptions from its affordability requirements, allowing lenders to vary a mortgage contract to temporarily reduce capital payments, including to zero and paying interest-only, for up to 6 months, and to reverse a term extension within 6 months of it taking effect, without assessing affordability¹². These apply once per contract, and not to second charge or bridging loan contracts¹². The rules themselves mirror this: MCOB 11.6.2R does not apply to a variation which reduces, including to zero, the capital repayments required under a repayment mortgage for a period of no longer than six months². The Mortgage Charter uptake data records the equivalent commitment, without assessing affordability, to permit customers who are up to date with their payments to switch to interest-only payments for 6 months, or to extend their mortgage term with the option to revert to their original term within 6 months²⁶.

At the other end, some changes are treated as material. The rules give examples of changes that may not be treated as immaterial to affordability: an extension of the term into the customer's retirement, changing between repayment and interest-only, and the addition or removal of a customer². The Mortgage Charter states the same from the borrower's side: affordability will need to be checked if borrowers wish to permanently convert to an interest-only mortgage, or where the mortgage term is proposed to be extended beyond the borrower's expected retirement date⁵. A variation which reduces the term of the contract is not covered by the exemption either; the firm must consider affordability in line with the Consumer Duty and its responsible lending policy².

One situation catches many people out. When a relationship ends, even if both agree or a court orders one person to take over the mortgage, the lender is not obliged to release the other person from it. Lenders apply their own affordability criteria and can refuse²⁷. The person staying in the home must pass the affordability assessment on their own income before the other is released.

Where the rules stop: mortgages they cover and do not

The FCA's mortgage conduct rules cover regulated mortgage contracts, including first and second charge mortgages and bridging loans, equity release products, home purchase plans, and sale and rent back agreements²⁸. The FCA regulates mortgages taken out since 31 October 2004, and also deals with problems with existing mortgages¹⁰. The rules do not apply to secured loans regulated by the Consumer Credit Act 1974¹⁰.

Whether a loan is a regulated mortgage contract turns on its purpose and the property. Loans to buy a small house with a large garden would in general be covered, but not if the garden was intended for another purpose such as third party use; a loan to purchase farmland and a farmhouse is not covered where the farmhouse and garden amount to less than 40% of the land area²⁹. A contract is not a regulated mortgage contract if it is a loan to a commercial borrower, a second charge loan by a credit union, a second charge bridging loan, or a CBTL credit agreement²⁹.

Buy-to-let sits outside because it is a business loan. A buy-to-let mortgage contract is regarded as entered into for business purposes where the borrower purchased or is financing purchase of land intended for rental occupation and not occupied by the borrower or a related person, or where the borrower owns other land occupied on a rental basis or secured by a buy-to-let mortgage³⁰. The MCOB early repayment charge rules do not apply to unregulated mortgages such as buy-to-let products, though the Ombudsman would still expect an early repayment charge to be clearly set out in the loan agreement and set at a level to cover the lender's costs²⁸. The Mortgage Charter commitments also do not apply to Buy to Let mortgages⁵. The business-purposes presumption does not apply if the lender, or anyone acting on its behalf, knows or has reasonable cause to suspect that the agreement is not entered into wholly or predominantly for business purposes³⁰, which protects borrowers whose "buy-to-let" is in substance a home.

The Mortgage Credit Directive: a seven-day reflection period and other protections

The Mortgage Credit Directive, Directive 2014/17/EU of 4 February 2014 on credit agreements for consumers relating to residential immovable property, was transposed into UK law in part by the Mortgage Credit Directive Order 2015¹¹. Its most tangible protection for borrowers is the reflection period. Where an MCD mortgage lender provides the consumer with a binding offer, it must give the consumer a reflection period of at least seven days⁶. The Directive itself provides that consumers must have sufficient time of at least seven days to consider the implications, whether as a period of reflection before conclusion, a period of withdrawal after conclusion, or a combination³². The firm must provide the consumer with a copy of the draft agreement at the beginning of the reflection period⁶.

The FCA consulted on this in CP14/20, proposing a compulsory pre-sale reflection period of at least seven days from the making of the binding offer³³. The final rules in MCOB 6A set the reflection period at seven days for binding offers from MCD mortgage lenders⁶.

The Directive also sits behind the advice standards borrowers receive. FCA rules set out standards to be observed by firms when advising a particular customer on regulated mortgage contracts³⁴. Lenders must also send an annual statement covering the regulated mortgage contract and any tied product purchased through the firm³⁵.

One practical effect of the reflection period sits alongside the speed of the market. The average mortgage product shelf life in Scotland was below the UK average in September 2024, which was 21 days³⁶. A seven-day reflection period on a binding offer is therefore close to the lifetime of many products on the shelf; a borrower who waits the full period may find the deal has been withdrawn. The reflection period is a right to think, not a guarantee that the rate waits.

Where to get free help

If you are struggling with mortgage payments, or stuck on a deal you cannot leave, free and impartial help exists. MoneyHelper offers free guidance, including on dividing the family home and mortgage during divorce or dissolution²⁷. The Financial Ombudsman can look at complaints about how a lender or adviser applied the rules, including interest-only advice and early repayment charges¹⁶. Debt advice charities, including Business Debtline for the self-employed, publish guidance on situations such as negative equity¹⁰.

For the underlying rules themselves, the FCA Handbook sets out MCOB 11, the responsible lending chapter, in full², and the Mortgage Charter page explains what signatory lenders have committed to. The mortgages section covers the products these rules govern, and early repayment charges explains the charge a borrower can face for leaving a deal early: a charge levied by the mortgage lender on the customer when the loan is repaid in full or in part before a date or event specified in the contract³⁷. Around 70% of current mortgage deals allow overpayments of up to 10% of the balance each year, and fewer than 10% of deals offer no overpayment options at all³⁸, so for most borrowers a modest early repayment is possible without a charge.