This guide was last updated 25 October 2023
The Mortgage Charter has been born out of the worry that the pace of interest rate rises, caused by the mini-budget back in September 2022 and the continuing high levels of inflation, has had a profound effect on many borrowers who are coming to the end of their existing mortgage product and facing the prospect of a huge jump in monthly costs.
We have seen clients facing uplifts of several hundred, even a thousand pounds a month.
This is something that many of us have raised as a potential issue, not the least TV campaigner Martin Lewis, and following talks between Martin, the Chancellor and some of the UK’s largest banks, the Government has introduced a set of standards that banks volunteer to adhere by in order to help mortgage borrowers struggling with higher rates.
This has been ratified by the Financial Conduct Authority and temporary rule changes have been made to accommodate this help.
This set of standards, which all banks have been asked to, rather than forced to, abide by is called The Mortgage Charter.
It is important to note that this is for residential mortgages only and is not available for buy-to-let mortgages or second charges.
It is also not set in stone, but any lender not offering this will be frowned upon both by Government and by their clients.
There are several different areas covered by the Charter, all of which relate to the fair treatment of borrowers approaching the end of their current product rate or struggling to cope with higher payments.
Some of the key points are:
These options can be taken by customers who are up to date with their payments without a new affordability check or affecting their credit score.
It should be noted that the monthly payments after the support may be higher than they otherwise would have been and overall costs over the life of the mortgage will be higher. This must be pointed out by lenders together with examples of additional costs.
In general, affordability will not need to be considered if the changes are made and returned to normal within a 6-month period.
Affordability will need to be checked, however, if :
One of the key changes of The Mortgage Charter from the current policy is the “no questions asked” approach and the “no impact on your credit score.”
This “no questions asked” policy should not be seen as an easy option to increase disposable income over the short term as the debt will remain and people still need a plan to pay it off.
Also, as we saw in COVID with the Mortgage Payment Holiday (I hate that name is it was not a holiday at all but a deferment plan), future underwriting decisions could be affected if help is taken – i.e., if you could not afford this a few months ago why would we lend a new mortgage to you for a new property or further advance?
In reality, 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.
Lenders have for a while now offered these types of arrangements for those struggling, and additional payments can already be made without any rule changes, and done with greater flexibility, for example 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.
It should therefore only be for those who need to have this help after looking at all the other options, not viewed as a nice to have – as it will increase costs of loan over the term, whilst giving short-term respite, and could cause issues in the future.
Whilst there are currently no “qualification” rules, in theory, this will be down to lenders as to how they apply this.
Borrowers need to be aware that if changes run over the 6 months period, it will potentially impact their credit score.
Due to the above, it is highly recommended that borrowers thinking of using this should take advice from a qualified broker before they do this – as this process through a lender is not “advised”.
Customers who are currently in arrears should continue to work with their lender for the support that they need.
In order to accommodate the new Mortgage Charter the FCA has made the following changes:
Before agreeing on either option, firms will need to give borrowers a personalised disclosure outlining the specific changes to the borrower’s amounts due, including where it is known that the payment will change, the new payment, and the date of the change in accordance with existing rules.
Where a customer is considering a temporary interest-only period, firms will need to disclose both the initial reduced payment amount and what the subsequent higher payments will be when the contract reverts to a full repayment basis.
The following illustrations show how using one of these new options would affect a borrower with an outstanding balance of £100,000, paying interest of 6%, and with 10 years remaining on their contract.
Reversal of term extension
Payments before extension: £1110
Payments following 10-year term extension: £716
Payments following reversal of extension after 6 months: £1138
This borrower defers approximately £2400 over the 6 months their term was extended, which still remains payable once their term reverts. Assuming their interest rate remains at 6% for the remainder of their term, they will pay around £800 more overall than if they had kept their term constant.
Payments before temporarily paying interest-only: £1110
Payments while temporarily paying interest-only: £500
Payments after end of temporarily paying interest-only: £1153
This borrower defers approximately £3720 over the 6 months of the interest-only period, which as above remains payable over the rest of their term. Assuming their interest rate remains at 6% for the remainder of their term, they will pay around £1200 more overall than if they had continued to make capital payments.
At the time of writing the following lenders have signed up to The Mortgage Charter:
Bank of Ireland UK
Bath Building Society
Buckinghamshire Building Society
The Co-operative Bank, including Platform and Britannia
Coventry Building Society
Darlington Building Society
Earl Shilton Building Society
Ecology Building Society
Family Building Society
Furness Building Society
Glasgow Credit Union
Hinckley & Rugby Building Society
HSBC, including First Direct
Kensington Mortgage Company
Leeds Building Society
Leek Building Society
Lloyds, including Halifax and Scottish Widows
Loughborough Building Society
Melton Mowbray Building Society
Monmouthshire Building Society
Nationwide Building Society
Natwest, including RBS and Ulster Bank
Newbury Building Society
Newcastle Building Society
Nottingham Building Society
Principality Building Society
Progressive Building Society
Scottish Building Society
Skipton Building Society
Suffolk Building Society
Teachers Building Society
Tipton & Coseley Building Society
TSB, including Whistletree
The Vernon Building Society
United Trust Bank Limited
Virgin Money, including Clydesdale Bank and Yorkshire Bank
West Bromwich Building Society
Yorkshire Building Society
Whilst The Mortgage Charter is undoubtedly a step in the right direction for many banks and lenders, care needs to be taken and advice sought before taking up the options.
Anyone who feels they need extra support should not shy away from asking for support and contacting either their lender or their broker earlier rather than later.
There is lots of help out there and we would be happy to take your calls and try to assist you in any way possible.
You can contact us here for a confidential chat with one of our friendly advisers.