What is The Mortgage Charter?

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.

What does The Mortgage Charter cover?

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:

• Anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file.
• 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.
• With effect from 10^th July customers approaching the end of a fixed-rate deal should have the chance to lock in a deal up to six months ahead
• Borrowers 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. (Rates must be finalised two weeks before the new term starts)

Signatories to The Mortgage Charter have agreed:

• 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.
• A new deal between lenders, the FCA, and the government permits customers who are up to date with their payments to:

2. 1. 1. 1. Switch to interest-only payments for six months (it must remain a Repayment mortgage overall)
         2. 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

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.

Affordability

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 :

• borrowers wish to permanently convert to an interest-only mortgage,
• or where the mortgage term is proposed to be extended beyond the borrower’s expected retirement date
• or when returning to a shorter term after a 6-month period

Potential issues with The Mortgage Charter

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.

FCA changes

In order to accommodate the new Mortgage Charter the FCA has made the following changes:

• New guidance clarifying how lenders can support borrowers impacted by the rising cost of living.
• These rules are exemptions from responsible lending requirements. They are not mandatory, but any lender may use them, subject to the limitations.
• FCA mortgage rule set aside on returning to a shorter term within 6 months because it means lenders will be required to agree to higher monthly payments without checking affordability.
• Information for borrowers on the options and support available if they are struggling with payment.

Example illustrations of the impact of 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.

Temporary interest-only

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.

Lenders who have signed up to this Charter

At the time of writing the following lenders have signed up to The Mortgage Charter:

Aldermore Bank

Bank of Ireland UK

Barclays

Bath Building Society

Buckinghamshire Building Society

The Co-operative Bank, including Platform and Britannia

Coventry Building Society

Danske Bank

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

Metro Bank

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

Santander

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

Summary

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.