Mortgage Market Review proposals claim HNW borrowers need less protection than other borrowers and are consequently suggesting laxer affordability rules on interest-only loans in particular.
The paper said: “We believe that it may be reasonable for us to take a more ‘free market’ approach to such individuals and allow them to willingly forgo the protection and remedies that would otherwise be available to them.”
The MMR suggests that in relation to home finance, HNW be defined as a consumer with a gross income of no less than £1m per year or net assets of no less than £3m.
It identifies two ways to create the freer market it proposes.
Either the FSA could disapply the mortgage rules for HNW consumers or it could allow the consumer to choose for themselves whether to forego the protections of the mortgage rules.
The latter approach would mean adopting an elective approach similar to that in the investment market.
The FSA said: “The majority of lending to high net worth mortgage consumers is structured on an interest-only, repayable on demand basis with no early repayment charges.
“This allows consumers the freedom to make lump sum capital reductions or to pay back the borrowing entirely where they have the resources to do so.
“HNW individuals are usually asset rich so lending decisions will be determined by the repayment strategy rather than the monthly repayment plan or amount.”
The FSA is also consulting about whether the MMR regime should apply at all to HNW borrowers.
It added: “There is an argument that above some level of income and wealth it is perfectly reasonable for a consumer to take greater risks and that regulation is not needed to protect those consumers from the decisions they have made.
“This reflects the general principle that the optimal risk-return trade-off changes as income and wealth rises.
“So, for example, the more wealth a consumer has, even if they find themselves unable to repay sums borrowed and lose their home, the consequence is likely to mean moving to a smaller house, not the loss of home ownership altogether.
“The potential detriment of being unable to repay is not sufficient to justify regulatory intervention.”
