The city regulator has urged mortgage borrowers struggling with repayments to contact their lender for help – although he admitted the number likely to struggle has fallen.
New guidance from the Financial Conduct Authority sets out ways mortgage lenders can help customers worried or already struggling with their mortgage payments due to the rising cost of living.
It covers options such as extending the term of their mortgage or reducing monthly payments for a temporary period, known as forbearance.
FCA issued guidelines as fixed rate lending to 1.4 million mortgage holders ends this year
The regulator said lenders can change the terms of a mortgage contract without carrying out a borrower’s affordability check when it comes to allowing forbearance.
He also warned that the lender or broker must ensure that customers are fully aware of the impacts of forbearance. Measures such as deferring payments can not only increase the amount a borrower owes, but also have a negative effect on the borrower’s credit report.
Iain Swatton, head of mortgages at rate tracking firm Dashly, says: “We saw similar measures during Covid where support was put in place to ease the burden on those who needed it most by taking a payment break with their mortgage.
“This happened without affecting your credit arrears and meant that if you were in financial difficulty, due to situations that were not your fault, you were not penalised.”
“The last thing lenders want is for homeowners to be in arrears or default on their mortgage. Most lenders will work with the homeowner to find a solution, whether that means reducing payments and extending the term or switching to an interest-only option.
If you’re having trouble paying your mortgage or are worried about doing so, you don’t have to fend for yourself. Your lender has a range of tools to help
Other options for borrowers who think they are struggling, or are currently struggling, to make their payments include switching to an interest-only loan for a while or switching to a different rate.
Extending the term of a mortgage is another option for borrowers to lower their monthly payments.
> What to do if you can’t pay your mortgage: we explain your options if you’re struggling to afford rising interest rates
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, adds: “Our research shows that most people keep up with mortgage repayments, but some may struggle.
“If you’re having trouble paying your mortgage or are worried about it, you don’t need to do it alone. Your lender has a range of tools to help you.
‘Contact us whenever you have any concerns, don’t wait until you are about to miss a payment before doing so. Simply telling them about your options will not affect your credit rating.
How big is the risk for mortgage holders?
Homeowners struggling with payments should speak to their lender as soon as possible
Overall, the FCA estimates that 356,000 mortgage borrowers could face payment difficulties by the end of June 2024, in addition to those already in arrears.
However, the situation has improved as the figure has fallen by 37% from the 530,000 households the regulator had previously estimated will fall into difficulty.
The reduction is due to an improvement in market expectations around the Bank of England base rate. Following last fall’s disastrous mini-budget, many expected the base rate to peak at 5.25% or higher.
However, falling inflation has bolstered expectations that the Bank of England will soon end its cycle of raising interest rates, with some economists now predicting a cut by the end of 2023.
While this is good news, the FCA still estimates that struggling households exiting a fixed rate mortgage could end up paying an extra £340 per month on average.
Additionally, research shows that borrowers between the ages of 18 and 34 are more likely to be financially strained than the rest of the working-age population. Regionally, those living in London and the South East are most likely to be stretched, although stretching does not necessarily mean payments will be missed.
Official ONS figures show that 57% of the more than 1.4 million fixed rate mortgages maturing this year were secured at interest rates below 2%. The cheapest rates available today are almost double that, at over 3.95%.
Nicholas Mendes of mortgage broker John Charcol says: ‘For many homeowners who have owned a property for the last 10 years, this will be the first time they have faced serial threats to their income and circumstances.
“Even with careful budgeting, some households will feel there is nothing left to cut. Although there are steps you can take to lower your monthly payments, not all of them are possible and it would be advisable to speak with the lender who can assess your situation.
Why have rates risen so quickly?
Mortgage rates began to rise in December 2021, when the Bank of England began raising its base rate in an attempt to combat rising inflation. However, this accelerated after the mini-budget at the end of September.
Borrowing costs in the UK jumped as investors sold their UK government bonds – known as gilts – before the Bank of England stepped in by announcing a bond-buying program of £65 billion to shore up the market.
Swaps on the rise: Swap rates are slowly rising after briefly dipping at the start of the year
After former prime minister Liz Truss resigned in October and new chancellor Jeremy Hunt canceled nearly all of the mini-budget announcements, markets calmed down and the cost of borrowing fell, mortgage rates also slowly decreasing.
However, it’s worth keeping an eye on prices as swap rates, the financial metrics on which most lenders base their mortgage prices, are going up.
Where are mortgage rates now?
After a short-lived rate war in which a number of headline-grabbing fixed deals fell below 4%, many lenders are now putting them back in place.
The platform withdrew its 3.75% rate for a five-year fixed deal less than 48 hours after entering the market as swap rates rose.
Others are following suit. On Monday (March 13), Coventry Building Society rates will increase on all standard two-, three- and five-year fixed mortgages. Barclays also raised rates on a selection of its two- and five-year fixed rate products.
However, there are still competitive offers on the market. The Yorkshire Building Society offers a five-year fixed rate at 3.98% for those with deposits of 25% or more. The Cumberland offers a similar loan for the same rate up to 60% loan to value.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate contract is coming to an end or because they have agreed to buy a home should explore their options as soon as possible.
This is Money’s best mortgage rate calculator, powered by L&C, that can show you deals that match your mortgage and property value.
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to get a rate.
Anyone with a fixed-rate deal ending in the next six to nine months should consider how much it would cost them to remortgage now — and consider entering into a new deal.
Most mortgage transactions allow fees to be added to the loan and they are then only charged at the time of subscription. By doing so, borrowers can secure a rate without paying costly arrangement fees.
What if I buy a house?
Those who have agreed to buy a home should also aim to get quotes as soon as possible, so they know exactly what their monthly payments will be.
Homebuyers should be wary of overstretching and prepare for the possibility of home prices falling from their current high levels, due to higher mortgage rates limiting people’s ability to borrow.
How to Compare Mortgage Costs
The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.
You can use our best mortgage rate calculator to view offers that match your home’s value, mortgage size, term, and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the loan mortgage that’s right for you.
> Check out the best fixed rate mortgages you could apply for
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