Written by on June 26, 2023
Jeremy Hunt has agreed three measures with lenders to help mortgage holders struggling with increased interest rates. A true agreement of this kind would not normally be made in a single meeting. So, I suspect this is a bit like Michael Gove’s “agreement” with the developers to pay for cladding repairs. My comments on each of the three measures are as follows:
1) A person can talk to their bank or mortgage lender and it will have no effect on their credit score
A person can actually talk to their bank or mortgage lender, and just talking will have no effect on their credit score. However, many borrowers are not aware of this and thus reinforcing the message is helpful but otherwise does not change anything. However, the letter 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 a broker than to a lender. The broker of the entire market will be able to advise on all options, while the lender can only advise on the solutions it can offer. Even when the broker’s advice is to talk to the lender, the borrower will be better prepared when having that conversation if he first talks to his broker and knows what other options, if any, are available to him.
2a) Lenders have “agreed” to allow struggling ones to extend the terms of mortgages or move to an interest-only plan temporarily with “no questions asked”
Lenders will usually actually agree to an extended period, depending on the age of the borrower, or switch to interest only, if the borrower can demonstrate that they will struggle to make their monthly payments. The changes here from the current policy are “no questions asked” and “no impact on your credit score.” However, the potential new lender can see from the credit file the details of any contract change and can therefore factor them into the lending decision. This policy will be implemented quickly, perhaps next month, but it will not go into effect immediately.
The “no questions asked” aspect will be seen by some borrowers as a bonus, but it is dangerous because it means that borrowers will be able to exercise this option without advice, which presents a risk that the FCA’s Mortgage Conduct Rules are designed to Avoid this, by asking borrowers to take counseling so that they understand the pros and cons of changing the mortgage contract. COVID mortgage franchises that gave borrowers the right to take short-term leave have been beneficial to many people but many others who didn’t need paid leave took it because they could, in many cases without fully understanding all the consequences, such as the increased cost of interest on the 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 will still need a plan to pay it off.
2b) If the borrowers want to return to the original mortgage deal within 6 months, they can do so, no questions asked
This leads coach and horses to FCA mortgage rules because it means lenders will be required to agree to higher monthly payments without an affordability check. However, to obtain any meaningful value, this option must have been in place for more than 6 months. Few borrowers who need to take one of the reduced payment options are likely to see their financial situation improve enough to return to contractual mortgage terms within 6 months. If a borrower takes one of the reduced payment options, it is more likely that he will be able to pay something extra rather than getting his payments back in full. Additional payments can already be made without any rule changes, and are made with more flexibility, simply by exercising the option in most mortgage terms to overpay up to 10% per annum (more in some cases) of the mortgage balance without incurring any repayment fees. early.
3) In extreme cases, lenders have agreed that there will be a period of at least 12 months before a “no-consent repossession” occurs
Current custom forbearance rules mean that in many cases it will be more than a year before a repossession begins but this 12-month guarantee is beneficial for affected borrowers – it gives them a fair amount of time to refinance or sell their property but in some cases the borrower can be left in a worse position, For example, in a downward real estate market, someone who makes no or only small monthly payments will see their equity eroded by the double whammy of a lower property price and an increased mortgage balance of unpaid interest. If there is no prospect of the borrower’s financial condition improving within a reasonable time frame, the longer the voluntary sale or repossession is delayed, the less the borrower’s equity will be, with the greater the risk of sale proceeds not covering the outstanding balance.
Conclusion
The government claims that the FCA is independent, but it is clear from these changes imposed by The Chancellor, some of whom lead coach and horses through the current FCA mortgage rules, that independence has limitations. Having said that it could be an incentive for the FCA to revise some of its rules. Prior to the regulation of the legal mortgage in 2004, some lenders used to offer a flexible mortgage that allowed any overpayments to be borrowed and/or used to fund underpayments if needed. This encouraged borrowers with spare cash to use it to overpay, knowing that they could access the overpayment if needed. Under FCA rules, accessing overpayments in this way is more complicated because the lender will have to run a new affordability test each time any excess funds are used. This FCA rule has in practice brought this consumer friendly mortgage feature to a halt and the only way for borrowers to have this flexibility is to take out a mortgage. The FCA’s new Consumer Duty rules (applicable from 7/31/23) require lenders to ensure that consumers get good results for the entire term of their mortgage and if lenders have the option to reintroduce this flexible feature to allow access to Overpayments that improve results for some borrowers.
category: Ray Bolger