28 June 2023
Why the Government's new mortgage charter is meaningless
Interest rates have been rising at an alarming rate in recent months. And as more people come off their fixed rate deals, they are seeing their monthly payments rocket by hundreds of pounds.
This of course is exactly what the Bank of England want. By imposing financial distress on a number of households, it hopes to reduce consumer spending and bring down inflation. It’s a pretty blunt instrument – but it’s an approach that the government is wholeheartedly behind.
Nevertheless, its uncomfortable for any government to admit that its economic strategy is built around inflicting extreme pain on a minority of homeowners. Hence it summoned banks to Downing Street last week to come up with a package of measures that will soften the blow.
Introducing the new Mortgage Charter
Earlier this week, the new commitments were published under the grand title of the “Mortgage Charter” – one of the best bits of spin I’ve seen in a while.
In case, you missed it, here’s what lenders have committed to. All UK lenders have agreed to:
- Allow people worried about their mortgage repayments to contact them for help and guidance, without any impact on their credit file (All lenders already do this)
- Provide support for customers who are up-to-date with payments by allowing them to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check (Almost all lenders already do this)
- Provide well-timed information to help customers plan ahead should their current rate be due to end (All lenders are already obliged to do this)
- 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. (Most lenders already do most of this)
The vast majority of lenders also signed up to these additional underwhelming promises:
- From 26th June, a borrower will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment (Hmm – more on this below)
- With effect from 10th July customers approaching the end of a fixed rate deal will have the chance to lock in a deal up to six months ahead. They will also be able to manage their new deal and request a better like for like deal with their lender right up until their new term starts, if one is available. (This is new, but would have been much more useful a year ago)
- The FCA and the government permitting customers who are up to date with their payments to:
- Switch to interest-only payments for six months or
- extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within 6 months by contacting their lender (a bit of breathing space, but not exactly revolutionary).
In aggregate, this is a completely underwhelming list of pledges – of which almost all already exist. Most lenders already allow borrowers to switch to new deals without a new affordability check. The big crime is that most keep quiet about this – hoping that customers will linger on the Standard Variable Rate. Many people do exactly that because their circumstances have deteriorated and they are too scared to call their lender and undergo a new set of checks.
The promise not to evict people within a year of missing a payment is also pretty laughable. Repossessions have been mercifully low in recent years. But in the rare cases they happen, it never takes less than 12 months to complete from the first missed payment. The courts need to be involved and obviously there are many many steps between a missed payment and repossession which lenders need to follow.
Offering interest only payments for six months is about the only thing on the list that I could find which isn’t already standard. But this is of course no great altruism from the banks. It will ultimately make them more money as borrowers defer their repayments.
All in all, this package amounts to very little. I’m bemused why 15% of lenders did not sign up to these additional measures. Names that are absent include some of the Northern Irish banks - Danske, AIB – as well as Atom.
Unfortunately, these measures will do very little to stem the extreme financial strain that many households will fall under as they come off their fixed rates over the next few months. And there’s a very real risk that the cumulative effect of these rate rises will go too far – and drive us into recession. But that’s another can of worms that I won’t get into today.