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Chancellor agrees mortgage 12-month grace period: how will it work and will interest rates rise again?

Martin Lewis met with the Chancellor this week to discuss how flexible options for mortgage holders could help people keep their homes and not affect their credit rating. Image credit: MSE
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Chancellor agrees on new support measures for mortgage holders in new mortgage charter. MSE’s Martin Lewis met with Jeremy Hunt to ensure people were getting a deal that was fair and flexible

The Chancellor met the UK’s principal mortgage lenders and the Financial Conduct Authority (FCA) this week to set up a “mortgage charter” for people struggling with mortgage repayments, HM Treasury has reported.

Not every lender is signed up for the protections, just over 75% of the market has agreed to a new mortgage charter providing support residential mortgage customers. However, the charter is covering good ground and is providing flexible options for borrowers until hopefully rates go down sometime in 2024/25. For example, the government is permitting customers to switch to an interest-only mortgage for six months, or extend their mortgage term to reduce their monthly payments and switch back to their original term within the first six months, if they choose to.

This could give people time to weigh up if they should sell their home, wait it out for rates to drop or find a new way to bring in extra income. None would be easy options due to the current economic landscape.

Mortgage arrears are going up

The latest market indicators (FCA; UK Finance) show that mortgage arrears and defaults remain below pre-pandemic levels, which were themselves extremely low. The FCA reported 0.86% of total residential mortgage balances in arrears in the first quarter of 2023 which is significantly lower than the 3.32% rate in 2009.

However, in 2009 we did not have a cost of living crisis to contend with. That’s largely why the Chancellor has put in place some protection for mortgage holders given the recent rise in interest rates. Data from UK Finance has found that the number of people not able to pay mortgage payments on time is creeping up to 76,630 (defined as being in arrears of 2.5% or more of the outstanding balance) in the first three months of 2023. This is a telltale sign that people will only struggle more if rates go up again.

On the subject of rates, there is something very telling in the latest set of protections, which could indicate interest rates could go up again before the end of the year.

That presumption is based on the fact that customers approaching the end of a fixed-rate deal will be offered the chance to lock in a deal up to six months ahead. They will also be able to apply for a better deal right up until their new term starts if one is available.

The unprecedented steep rise in mortgage rates is causing a nightmare for many with variable mortgages and those coming off fixes. Therefore, the most important thing we can focus on right now is appropriate, flexible forbearance measures.

While the Bank of England’s aim is intended to squeeze people’s disposable incomes, no one wants people’s lives to be ruined by arrears and repossessions – and that is the urgent protection we need to focus on.

Martin Lewis, founder of MoneySavingExpert.com

Here is the list of the mortgage charter protections:

  • Customers won’t be forced to have their homes repossessed within 12 months from their first missed payment
  • Anyone worried about their mortgage repayments can call their lender for information and support, without any impact on their credit score and HM Treasury would encourage you to contact your bank which is there to help
  • Customers approaching the end of a fixed-rate deal will be offered the chance to lock in a deal up to six months ahead. They will also be able to apply for a better deal right up until their new term starts if one is available.
  • A new agreement between lenders, the FCA and the government permitting customers to switch to an interest-only mortgage for six months, or extend their mortgage term to reduce their monthly payments and switch back to their original term within the first six months, if they choose to. Both options can be taken without a new affordability check or affecting their credit score.
  • Support for customers who are up-to-date with payments to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.
  • Providing well-timed information to help customers plan ahead should their current rate be due to end.
  • Offer tailored support for anyone struggling and deploy highly trained staff to help customers. This could mean extending their term to reduce their payments, offering a switch to interest-only payments, but also a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the customer’s circumstances.

Disposable income isn’t what it used to be

The proportion of disposable income spent on mortgage payments is currently at 5.4%, compared to around 10% in the 1990s and prior to the financial crisis.

The average homeowner re-mortgaging over the last twelve months had around a 50% loan-to-value ratio. This indicates homeowners have considerable equity in their homes, which makes it easier to manage repayments. Lenders have less than 10% ‘owner-occupier mortgages’ on their books with loan-to-value rates greater than 75%, compared to around 25% before the 2008 financial crisis. Taken together, this puts the market in a significantly stronger position than before.

Self-employed and key workers are still seen as high risk

Data from Lendinvest shows that obtaining a mortgage is particularly difficult for those who are self-employed, key workers, or have poor credit scores. Amongst these groups, over two-thirds have applied for a mortgage in the past, with a significant proportion being turned down at least once. In particular, those with poor credit scores, 18-34-year-olds, and men are more likely to have been turned down for a mortgage than others.

The Ledninvest survey also sheds light on the channels used by those who have applied for a mortgage
in the past. The majority went through high street lenders or mortgage brokers, while a smaller proportion used non-high street lenders. Interestingly, those who were turned down for
a mortgage at least once were equally likely to have gone through high-street lenders or
mortgage brokers.

That said, the self-employed may be wise to go to a broker who specialises in self-employed mortgages or mortgage lenders who have a high proportion of self-employed borrowers, which is a sign they understand how self-employment works.

“Banks are always trying to find ways of rejecting self-employed applicants so this makes it even more
stressful. Life is on hold during the process and this makes me very anxious,” says a 37 yr-old non-salaried man from the South East.

Even when you are earning good money high street banks still do not value self-employed borrowers as salaried ones, according to some of those surveyed.

“My partner was self-employed when we took out our first mortgage. He was earning good money, but the mortgage providers didn’t like it and made getting a mortgage much more difficult,” says a 44 yr-old man from London.

The mortgage holders at highest risk of losing their homes

The Chancellor of the Exchequer, Jeremy Hunt, says he’s especially worried about certain groups who could find making mortgage payments especially difficult:.

There are two groups of people that we are particularly worried about. The first are people who are at real risk of losing their homes because they fall behind in their mortgage payments.

And the second are people who are having to change their mortgage because their fixed rate comes to an end, and they’re worried about the impact on their family finances of higher mortgage rates.

Hunt says he agreed with the banks and the principal mortgage lenders and the Financial Conduct Authority on three very important things:

  • “The first is that absolutely anyone can talk to their bank or their mortgage lender and it will have no impact whatsoever on their credit score.
  • “The second is that if you are anxious about the impact on your family finances and you change your mortgage to interest only or you extend the term of your mortgage and you want to go back to your original mortgage deal, within six months, you can do so, no questions asked and no impact on your credit score. That gives people a powerful new tool for managing their monthly budgets – and it will begin taking effect within the next two weeks.
  • “And finally for people who are at risk of losing their home in that extreme situation, the banks and mortgage lenders have a number of things in place. The last thing that they want to do is to repossess a home, but in that extreme situation they have agreed there will be a minimum 12-month period before there’s a repossession without consent.

“These measures should offer comfort to those who are anxious about high-interest rates and support for those who do get into difficulty.

“Tackling high inflation is the Prime Minister and my number one priority. We are absolutely committed to supporting the Bank of England to do what it takes. We know the pressure that families are feeling. That’s why we’ve introduced big support packages around £3,000 for the average household this year and last.

“But we will do what it takes, and we won’t flinch in our resolve because we know that getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and on businesses.”

Flexible mortgage arrears and forbearances

Martin Lewis, founder of MoneySavingExpert.com says the pending mortgage payment crisis is a “nightmare” that has brewing for some time.

“The unprecedented steep rise in mortgage rates is causing a nightmare for many with variable mortgages and those coming off fixes. Therefore, the most important thing we can focus on right now is appropriate, flexible forbearance measures. While the Bank of England’s aim is intended to squeeze people’s disposable incomes, no one wants people’s lives to be ruined by arrears and repossessions – and that is the urgent protection we need to focus on.”

“I met the Chancellor on Wednesday and reiterated that the minimum we needed was to ensure that when people asked for help from lenders, they knew that if things changed, it wouldn’t be detrimental to their financial situation and their credit scores would be protected as much as possible.

“I’m pleased to see it looks like the Chancellor has listened and those measures are going to be put in practice by the banks. We need to make sure everybody knows their rights if they are in trouble with their mortgage, so they can feel comfortable speaking with their lender and understand the measures that they can request for help.”

Articles about self-employed mortgage holders that you may find useful:

Contractors looking to buy a new home or switch mortgages need to spot these red flags

Self-employed Mortgages: How to best prepare

What documents do you need for a self-employed mortgage?

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