Jeremy Hunt's Mortgage Charter
Written on 26 June 2023 by
Jeremy Hunt has “agreed” three measures with lenders to help mortgage holders struggling with increasing rates. A genuine agreement of this sort would not normally be made at a single meeting. Therefore, I suspect this is rather like Michael Gove’s “agreement” with developers to pay for the cladding remediation. My comments on each of the 3 measures are as follows:
1) Anyone Can Talk to Their Bank or Their Mortgage Lender and It Will Have No Impact on Their Credit Score
Anyone can already talk to their bank or their mortgage lender and just talking will have no impact on their credit score. However, many borrowers don’t realise this and so reinforcing the message is helpful but otherwise it doesn’t change anything. However, the message should also have included the mortgage broker - over 80% of new mortgages are arranged through a broker and many borrowers will feel more comfortable talking to their broker than their lender. A whole of market broker will be able to offer advice on all options, whereas the lender can only advise on solutions it can offer. Even when the broker’s advice is to speak to their lender the borrower will be better prepared when having that conversation if they have first spoken to their broker and know what other options they have, if any.
2a) Lenders “Agreed" to Allow Those Struggling to Extend the Terms of Their Mortgages or Move to an Interest-Only Plan Temporarily with “No Questions Asked”
Lenders will normally already agree to an extended term, depending on the borrower’s age, or a switch to interest only, if the borrower can demonstrate they would struggle to meet their monthly payments. The changes here from current policy are “no questions asked” and “no impact on your credit score.” However, a potential new lender can see from the credit file the details of any contract change and so could still take it into account in a lending decision. This policy will be implemented quickly, probably next month, but is not effective immediately.
The “no questions asked” aspect will be seen by some borrowers as a bonus, but it is dangerous as it means borrowers will be able to exercise this option without advice, which introduces a risk which the FCA’s Mortgage Conduct of Business Rules were designed to avoid, by requiring borrowers to take advice so that they understood the pros and cons of changing their mortgage contract. The COVID mortgage concessions which gave borrowers the right to take a short term payment holiday were helpful for many people but many others who didn’t need a payment holiday took it because they could, in many cases without fully understanding all the consequences, such as increasing the interest cost of their mortgage, perhaps unnecessarily. This “no questions asked” policy should not be seen as an easy option to increase disposable income as the debt will remain and people still need a plan to pay it off.
2b) If Borrowers Want to Go Back to Their Original Mortgage Deal Within 6 Months They Can Do So, No Questions Asked
This drives a coach and horses through the FCA mortgage rules because it means lenders will be required to agree to higher monthly payments without checking affordability. However, to have any meaningful value such an option would have to apply for much longer than 6 months. Few borrowers who need to take up one of the reduced payment options are likely to see their financial position improve sufficiently to revert to their contractual mortgage terms within 6 months. If a borrower has taken one of the reduced payment options, it is much more likely that they will be able to pay something extra than fully reinstate their payments. Additional payments can already be made without any rule changes, and done with greater flexibility, by simply exercising the option in most mortgage terms to overpay up to 10% p.a. (more in some cases) of the mortgage balance without incurring any early repayment charges.
3) In Extreme Situations Lenders Have Agreed There Will Be a Minimum 12 Month Period Before There’s a "Repossession Without Consent”
Current Tailored Forbearance rules means that in many cases it would be more than a year before repossession was initiated but this 12 month guarantee is helpful to impacted borrowers - it gives them a reasonable amount of time to refinance or sell their property but in some cases could leave the borrower in a worse position, i.e. in a falling property market someone making no or only small monthly payments will see their equity eroded by the double whammy of a lower property price and an increasing mortgage balance from the unpaid interest. If there is no prospect of the borrower’s financial position improving within a reasonable timeframe the longer a voluntary sale or a repossession is delayed the less equity the borrower will be left with, with an increased risk of the sale proceeds not covering the balance due.
Conclusion
The Government claims that the FCA is independent, but it is clear from these changes mandated by The Chancellor, some of which drive a coach and horses through current FCA mortgage rules, that the independence has limitations. Having said that it could be a catalyst for the FCA to review some of its rules. Prior to Statutory mortgage regulation in 2004 some lenders use to offer a flexible mortgage which allowed any overpayments to be borrowed back and/or used to fund underpayments if needed. This encouraged borrowers with spare cash to use it to overpay, knowing they could access the overpayment if needed. Under FCA rules accessing overpayments in this way is much more complicated because the lender would have to carry out a new affordability test every time any overpaid funds were utilised. This FCA rule has in practice resulted in this very consumer friendly mortgage feature ceasing to exist and the only way for borrowers to have this flexibility is by taking an offset mortgage. The FCA’s new Consumer Duty rules (applying from 31/7/23) require lenders to make sure consumers have good outcomes throughout the whole mortgage term and if lenders had the option to reintroduce this flexible feature of allowing overpayments to be accessed that would improve outcomes for some borrowers.
Category: Ray Boulger
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