How will the new Mortgage Charter help borrowers?

After a long period of stability, mortgage rates have hardly been out of the news headlines. In September, everyone held their breath as the Bank of England - responsible for UK-wide monetary policy - made its latest announcement.

The decision to hold the interest rate at 5.25% was made during the same week that inflation unexpectedly fell from 6.8% in July to 6.7% in August. Although there was a drop in inflation, it was incremental and it doesn’t mean that life is getting cheaper. On the contrary. The cost of living is still rising but it’s doing so more slowly - prices are still an average of 6.7% more costly now when compared to 12 months ago.

Stubbornly high inflation comes at a time when mortgage rates are in new territory. Borrowers taking out new mortgages and those remortgaging have found today’s rates are in the region of 5-6% - double and even triple what we saw in 2008, when some borrowers could secure home loans with rates starting with a 1.

The cost of living, combined with elevated mortgage rates, is making it financially uncomfortable for some coming off fixed-rate mortgages, and the adjusted rates can also act as a deterrent for first-time buyers, who are vital for the fluidity of the buying and selling market.

The synergy between buyers, sellers, mortgage lenders, and even landlords and tenants, is so important that a new joint initiative, designed to help borrowers, was launched in August 2023. The Mortgage Charter is an agreement between the Government, the Financial Conduct Authority (FCA) and the majority of mortgage lenders in the UK.

The Mortgage Charter is designed to make taking out a mortgage more straightforward by clearly setting out the options and assistance available to those experiencing affordability issues. Lenders signed up to the initiative are unified in the options they offer. This ensures people, at the point of taking out a mortgage, are clear on how the lender may support them if their circumstances change during the loan’s repayment period.

The Mortgage Charter will also help those already paying off a mortgage. It recognises now, for many homeowners, will be the first time they have experienced higher mortgage rates. The Charter will be something the borrower can refer to and check to see what next steps are available. It is hoped that knowing the options available will reduce the anxiety and stress that comes with changing mortgage rates.

Crucially, all of the options included in the Mortgage Charter will not affect a borrower’s credit score. Previously, some of the assistance offered by lenders would impact a credit score and this was not always made clear.

The options open to borrowers include:

Swapping to an interest-only mortgage for 6 months: this option will result in lower monthly repayments for a temporary period of time. During this period, however, none of the capital will be paid off of the mortgage.

Locking into a better deal in advance: this option allows borrowers to take advantage of better mortgage rates up to six months before their current fixed-rate ends. This is advantageous if a borrower thinks mortgage rates are going to rise before their current product expires. With this option, borrowers can also ask for a better rate from the lender two weeks before their new deal starts, which is ideal if mortgage rates have started to decrease. This avoids someone being stuck with a high rate in a falling market.

The Mortgage Charter will also offer new protection against home repossessions. Unless there are exceptional circumstances, borrowers will be protected from repossession for 12 months after a first missed payment.

As you would expect, there are caveats and exceptions. The assistance options are not open to those with a buy-to-let mortgage. Additionally, specific assistance may not be accessible by those who have already missed a repayment, have an interest-only mortgage or have a second-charge mortgage.

While the majority of UK lenders have signed up to the Mortgage Charter, there are a few who are operating outside of the initiative. These lenders, however, are now subject to a rule change by the FCA. All borrowers facing financial difficulty can still reduce their capital repayments substantially or only pay the interest for up to six months. They can also fully or partly reverse a term extension when circumstances allow. Both options are available without the need for a new affordability assessment.

If you would like to talk about your current home loan or about a new mortgage you wish to take out, please get in touch. We can offer initial thoughts and put you in touch with a financial adviser.