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What is the Mortgage Charter and what help does it offer borrowers?

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Interest rates are at the highest they’ve been for 15 years, as the Bank of England (BoE) continues to increase the Base Rate to try to combat stubbornly high inflation. And this has led to increasingly higher costs of mortgages, and the fixed rates offered to borrowers.

This means that those taking out mortgages for the first time, or those coming to the end of their fixed-rate term, are now facing much higher rates compared to the historic lows we’ve seen since 2008.

You can check what the current average fixed-rate mortgage rates are, across a range of different deposit sizes.

In response to rising costs for borrowers, a Mortgage Charter has been agreed between the government, the Financial Conduct Authority (FCA) and the majority of mortgage lenders. The FCA has additionally published some new rules* to support the Mortgage Charter, which apply to the whole mortgage market in the UK.

The Mortgage Charter is designed to offer some consistent and clear options to people who are struggling with their mortgage repayments. And for those anxious about the impact of an increase in monthly payments when their existing fixed-rate deal ends.

But if you can continue making your monthly mortgage repayments in the usual way, that’s likely to be the best option for you. This is because by keeping up with your monthly payments as normal, you’ll pay less money back to your lender overall.

Why has the Mortgage Charter been introduced?

Lenders assess affordability when you take out a mortgage by looking at what you can afford now, and also take into account possible mortgage rate rises. For example, since 2013 lenders have been required to assess if borrowers could still afford the mortgage terms offered, should rates rise to 7%. You can read more about how lenders assess affordability here. But people’s circumstances can change over the course of their loan terms, and lenders will have various forbearance measures in place if you do need assistance. Not every lender offers the same options all the time and some of these could impact your credit score – but the charter brings everything in line, and puts a consistent package of options in place.

But because a mortgage is repaid over a long period of time, individual circumstances can change, and there may be a time when you need to ask your mortgage lender for support.

Previously, the options if you’ve fallen into difficulty can range from flexibility in the current deal you have, such as changing the mortgage term, to more formal arrangements, such as a temporary switch to paying off the interest on the loan, without the loan repayments. But these options have varied between lenders and have been subject to individual circumstances.

The Mortgage Charter now clearly sets out the measures that are available to any home-owners experiencing difficulties, and those anxious about the impact of higher monthly repayments. This means every borrower can now check exactly what the available next steps are.

Most of the mortgage lenders in the UK have signed up to the charter, and by doing so have committed to offering these consistent support options to people facing higher payments. The FCA has additionally published some new rules* to support the Mortgage Charter, which apply to the whole mortgage market in the UK.

I’m struggling to meet my monthly mortgage repayments – what options do I have?

Lenders signed up to the Mortgage Charter have made a commitment to offering the same range of support options to borrowers.

The support options available include:

Switching to an interest-only mortgage for six months

This would mean that you’ll only pay off the interest for a six-month period, rather than paying off the capital on your mortgage (that is, the amount you’ve borrowed to cover the cost of your home). This is the option that will reduce your monthly payments by the most in the short term, as you won’t be paying off any of the capital against your home.

However, it’s important to remember that when you switch back to a repayment loan, more will eventually have to be repaid each month to make up for the missed capital repayments.

Extending your mortgage term to reduce monthly payments

Extending your mortgage term will mean your monthly payments reduce, as you’ll be spreading the amount you pay back to your lender over a longer period of time (such as 30 years, rather than 25 years). But keep in mind, this will mean you’ll end up paying more interest on the loan overall.

You’ll also need to let your lender know if you want to switch back to your original term at any point – such as when you’re feeling comfortable about making larger monthly payments. This could also mean you’ll need to pass another affordability assessment conducted by the lender, to make sure you still meet their eligibility criteria. Some lenders may give you the option to automatically move back to your original term after 6 months without needing an affordability assessment – so you should check this.

If you need further help with your payments, there’s also a range of alternative options available that could help. The best thing to do is to speak to your lender, so these options can be explained to you and your lender can look at tailoring a package to suit your individual circumstances.

The Mortgage Charter also protects all home-owners from the home repossession process for 12 months after a first missed payment, unless in exceptional circumstances.

The option to lock in a new fixed-rate up to 6 months before your fixed-rate deal ends

With effect from 10th July, if you’re approaching the end of a fixed-rate deal, you’ll have the chance to lock in a new deal up to six months before it ends. You can also request a better like-for-like deal with your lender up to two weeks before your new term starts, if one is available.

These options will be open to anyone with a residential mortgage: the only criteria for eligibility will be holding a mortgage with a lender that’s signed up to the Charter.

It’s worth noting that these options aren’t available to people with buy-to-let mortgages, and there are certain exceptions. For example, if you’re already behind on your monthly payments, you already have an interest-only mortgage, or you have a second-charge mortgage.

Unlike some of the other options available before the Charter was put in place, anyone choosing to use one of the options in the charter won’t see an impact on their credit score.

Check monthly repayments using our Mortgage Charter calculator

You can use the calculator below to check how much your monthly payments would change by, if you were to opt for one of the options available under the charter.

However it’s important to note that while your monthly payments will reduce by the amounts shown, you’ll ultimately pay more money back to your lender over the course of your loan. This is because both options will mean you’ll need to pay back more interest, albeit spread out over the course of your mortgage term.

So if you’re able to continue making your monthly mortgage repayments in the usual way, that’s likely to be the best option for you. Even though your monthly payments might have increased – or be set to increase when your current fixed-rate ends – by keeping up with your monthly payments as normal, you’ll pay less money back to your lender overall.

I’m coming to the end of my fixed-rate deal soon – is there any help available?

Customers coming to the end of a fixed-rate product will be able to lock in a new deal up to six months ahead of their deal ending. You can also request a better like-for-like deal up to two weeks before the new term starts, should one become available.

Another lender commitment within the charter is to offer tailored, individual support to anyone struggling, as well as providing clear, timely information to customers about their options. If you’re struggling to with your mortgage payments, or anxious about what might happen when your fixed-rate deal ends, the guidance is to speak to your lender as soon as possible, as they’ll be in the best position to help you.

The header image for this article was provided courtesy of Henderson Property Services, Whitby

*Why has the Financial Conduct Authority (FCA) changed its rules?

The FCA has introduced changes to its rules to support the Mortgage Charter and has made these rules applicable to the whole of the mortgage market in the UK. So, if you see that your lender hasn’t signed up to the Mortgage Charter, the options below still apply: 

  1. You have the option to reduce your capital repayments (including to zero, and paying interest only) for up to 6 months.
  2. You can fully or partly reverse a term extension within 6 months of extending the term.

Lenders may now offer both these options without a new affordability assessment.

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