One of the main City watchdog shas estimated an extra 356,000 mortgage borrowers could face payment difficulties by the end of June 2024, in addition to those who are already behind.
The Financial Conduct Authority has issued final guidance to lenders who have mortgage borrowers struggling with payments.
Charlotte Nixon, mortgage expert at Quilter said that while the figure was a worrying statistic, it was down 214,000 from the 570,000 borrowers the FCA previously estimated in September last year due to changes in market expectations of the Bank of England base rate.
“However, a slightly rosier forecast should not be misconstrued as a signal that we are out of the woods. Millions of people will still face hardship because of their mortgage bills and many others will fall behind putting them in a dangerous financial situation.”
Nixon urged borrowers experiencing financial difficulties to contact their lender and discuss your situation with them. “The lender may be able to offer you a variety of options to help you manage any payment shortfalls that may arise.”
The FCA has also revealed a suite of guidance for lenders with customers that are struggling to keep up with payments.
“This is largely around offering customers forbearance options. Forbearance refers to a temporary agreement between a lender and a borrower in which the lender allows the borrower to temporarily reduce or pause their payments on a loan.
“Forbearance may be granted for various reasons such as financial hardship, illness, or other unexpected circumstances that may prevent the borrower from making their regular loan payments. This might include putting a customer on an interest only mortgage for a period of time to reduce their monthly payments.”
“It’s also important to keep in mind that while forbearance may provide temporary relief, it may also have long-term implications on your credit score and the total amount you’ll end up paying on your loan. Make sure to fully understand the terms and implications of any forbearance arrangement before agreeing to it and if unsure talk to a mortgage adviser as they can fully assess your needs and review your wider options.”
Mortgage difficulties and FCA guidance
The FCA’s guidance states that “if a customer indicates that they are experiencing or reasonably expect to experience payment difficulties due to the rising cost of living, firms should offer prospective forbearance to enable them to avoid, reduce, or manage any payment shortfall that would otherwise arise. This
includes customers who have not yet missed a payment.”
Lenders have been told they must offer help to borrowers – these options may include:
Interest rate switches
“Firms may offer borrowers the ability to switch their interest rate. Where there are no other changes to the terms of their contract, and the interest rate change is not material to affordability, the requirement to undertake an affordability assessment will not apply.”
The FCA also states: “A borrower may be switching from an expiring fixed or otherwise incentivised rate
to a higher incentivised or fixed rate. To determine whether this change would be material to affordability and therefore whether the requirement to undertake an affordability assessment will apply firms can compare the proposed new rate to the rate the customer would pay if not for the change – such as any standard variable rate (SVR) that would apply once the current deal expires.
Extending the term of a mortgage
“Some customers seeking to reduce their monthly payments may want to extend the term of their mortgage. An affordability assessment will not generally be required for term extensions up to the customer’s expected retirement age if there are no other changes to the terms of the mortgage. Where the term is extending into (or further into) retirement, it is more likely that the change would be material to affordability in which case an affordability assessment would be required.
Switching to and interest-only mortgage
Some borrowers seeking to reduce their monthly payments may want to switch their repayment mortgage onto an interest-only basis for all or part of its remaining term.
The FCA states: “A firm may agree to vary a contract from a repayment mortgage to an interest-only
mortgage (permanently or temporarily) if it has evidence that the customer will have in place a clearly understood and credible repayment plan.”
What else can mortgage borrowers do?
Mortgage rates have come down over the last few months but they are starting to creep up again, said Aaron Strutt of Trinity Financial.
For those that can afford it, a fixed-rate will still be more expensive but may offer some security.
Strutt said: “The sub-4 per cent rates are disappearing fast. Nationwide increased its cheapest rates and Platform pulled the lowest five-year fix at 3.75 per cent within a few days. Other big lenders including HSBC have also raised rates.
“The new benchmark for the best buy mortgages is around 4.25 per cent and with another Bank of England base rate hike expected, any rate around this price seems relatively good value for money.
The mortgage market is recovering from Liz Truss’s tax give away and there are more rates available, but they are much higher. More borrowers will be calling their lender to ask for help when their repayments rise.
“More of our clients are taking two year fixes because it is likely rates will come down once inflation is under control. It is really important borrowers make sure they avoid automatically reverting onto their lenders standard variable rates as many of them are shockingly high at 7.5per cent. In fact Halifax’s SVR is 7.49 per cent as is Nationwide’s and HSBC’s is 6.99 per cent.”
Samuel Mather-Holgate an independent financial adviser at Mather and Murray Financial said borrowers failing to meet thier mortgage commitments because of some catastrophic news like losing a job or an illness that means they cannot work, will find that most lenders will bend over backwards to help.
He explained: “They could extend your term, offer a mortgage holiday or put you on interest only. However, if nothing has changed in your personal circumstances and it’s just the rise in interest rates that is causing you difficulties they will be less willing. Affordability checks should have been built in to your application for circumstances just like this.
“You should still ask your lender for help though, as there might be better rates they can offer or extend your loan term. Better still, speak to an independent mortgage broker who will take the time to understand your situation and tailor their advice to your objectives.”
Gaurav Shukla, chief executive at at home me, said there are plans that can be put in place to ease payments.
“Butt be wary at how this may effect your credit report, if it does. If your mortgage is due to come to and end soon and need a new product, your mortgage broker will be able to assess affordability and make the monthly payments fit your monthly budget. “
“However, once we’re out of this situation and rates come down, your broker can revert the payment time back to repayment and decrease the term. Be sure to speak to a broker for the right advice.”
Rohit Kohli of The Mortgage Stop urged borrowers not to panic.
“Firstly it’s important to remember that lenders do not want to repossess your home – it’s a last resort.
“They have lots of steps and methods to help. We also say to our clients to speak to us – depending on their mortgage product, how long left in any lock in period and other liabilities – there may be options they can look at to help you.
“What is vital is to not ignore the problem, it could have long lasting impacts affecting your credit rating and ignoring it will make it worse. There are also some great charities that can offer help such as step change who offer free debt advise and could also be a good first step if you have multiple debts you are struggling to pay.”