Prudential Regulation Authority Rulebook

20.1

This chapter sets out the PRA’s expectations in relation to retirement interest-only (RIO) mortgages as well as certain interest-only (IO) mortgages which are converted into RIO mortgages.

20.2

The PRA expects, at a minimum, that firms should classify conversion of existing exposures to RIO mortgages as being distressed restructuring in cases where (a) the exposure is in default as a result of being a past-term interest only (PTIO) mortgage, or (b) the firm has assessed that the obligor is unlikely to be able to make outstanding principal payments in respect of the exposure.

20.3

For defaulted IO mortgages to return to non-defaulted status following conversion to a RIO mortgage, the borrower should make a material payment of principal of the IO mortgage such as is necessary to meet the lender’s RIO underwriting criteria. In particular, the material payment should be sufficient to reduce the loan to value ratio (LTV) to the maximum at which the lender will offer a RIO product. The payment amount could be zero if the LTV of the RIO mortgage is less than or equal to the level at which the lender will underwrite the product.

20.4

Firms should be able to demonstrate the appropriateness of the treatment of IO mortgages that are converted into RIO in their IRB models through robust analysis. In particular, as a minimum, consideration should be given to the effect of IO defaults on the IRB model estimates for IO mortgages. A prudent approach should be applied to the modelling of IO mortgages that return to non-defaulted status only as a result of the borrower being transferred to a RIO product.

20.5

The PRA considers that there may be some circumstances where it may be appropriate to model RIO mortgages with other mortgages, but it considers that firms should be able to justify this. The PRA expects that firms wishing to apply the IRB approach in respect of RIO mortgage exposures should apply to the PRA for permission to do so. The PRA will only grant permission once it is satisfied that the relevant CRR requirements are met. The PRA would not expect firms to apply to use the IRB approach for RIO mortgages until they have sufficient data to demonstrate that their approach is prudentially appropriate and consistent with the requirements of the CRR.