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Understanding What the Mortgage Charter Means for Homeowners

Understand the purpose of the newly announced Mortgage Charter, how it intends to help homeowners, and how to address soaring mortgage repayment costs.

02 August 2023

Mortgage Charter support a man and woman worried mortgage costs

The Mortgage Charter is a recently announced agreement reached between the UK’s financial regulator, the Financial Conduct Authority (FCA), the British government, and a collective of many of the largest mortgage lenders – but what does it mean in real-world terms, and will it really help?

Following multiple successive interest rate rises, owing to the Bank of England’s efforts to tackle inflation, thousands of homeowners with variable-rate mortgages have seen their monthly mortgage payments climb alarmingly.

Further issues are affecting those approaching the end of a fixed-term mortgage contract, facing steep hikes in interest rates, and first-time buyers finding it financially impossible to proceed with a property purchase due to the costs of borrowing.

The new Mortgage Charter is cited as a solution – below we examine what it means, how it will work, and why it may matter to you.

What Is the Mortgage Charter?

Amid a climate of high interest rates and discrepancies between the support offered by UK mortgage lenders, the FCA and the government have stepped in to negotiate an agreement with several of the biggest banks. In addition, the FCA has created some new rules to support the charter, which apply universally to the mortgage market.

In short, the objective of the Mortgage Charter is to create consistency and clarity for the countless mortgage holders who are finding themselves in a difficult position and to address the concerns about unaffordable leaps in mortgage costs for those about to reach the end of a fixed-term agreement.

One of the caveats is that the Mortgage Charter, while available to all, is not necessarily applicable to every homeowner or every property buyer. If you are happy that you can manage your monthly payments, or want to proceed with a property acquisition, remortgage or move, you can go ahead without any specific changes.

The Background to the New Mortgage Charter

Affordability assessments are a standard part of the application process for anybody looking to take out a mortgage, refinance an existing mortgage or amend the terms of their agreement. The norm has, since 2013, been for lenders to stress-test applications to determine whether an applicant would still pass affordability evaluations should the interest rate increase to 7%.

There are several complications here, based on different assessment approaches between lenders, and how a mortgage provider might react if an applicant does not pass the stress test.

The Mortgage Charter intends to bring those responses into line. In the past, one lender may have proposed an extended term, another may have suggested an interest-only mortgage, and others would have refused the borrowing altogether.

Now, the Mortgage Charter prescribes the measures lenders must provide, either to current borrowers’ worried about being able to maintain repayments or those dealing with a challenging refinancing situation.

Most UK mortgage lenders have committed to the charter and are extending the support programmes available.

What Do Lenders Need to Offer Under the Mortgage Charter?

Every lender that has signed up to the charter must provide a number of support options:

  • Offering an interest-only repayment structure for six months.
  • Offering a longer mortgage term to reduce monthly repayments.
  • Offering confirmed interest rates up to six months before a fixed-term agreement ends.

We explain what each of those solutions means for your repayment costs and long-term mortgage borrowing prospects below.

Short-Term Interest-Only Mortgage Payments

Interest-only mortgages are most common in the rental property sector, where landlords pay only the interest owing on their borrowing. They then refinance the original amount borrowed at the term end, normally by selling or remortgaging the investment property.

Under the Mortgage Charter, lenders must offer residential borrowers the option of a six-month interest-only period, which will significantly reduce the payable value per month.

The downside is that, by paying only interest for six months, your long-term overall repayment will be higher, and you may find that, if the agreement is not coupled with a term extension, your monthly costs could potentially rise after the six months to compensate for the missed capital repayments.

Increasing Your Mortgage Term

Mortgage agreements tend to run for a standard 25 years, but lenders may offer much shorter or longer terms depending on the circumstances and your borrowing requirements. One of the resolutions included within the charter is the need to offer a longer term, effectively reducing monthly mortgage costs for the duration.

Examples might include extending the final repayment date to 30 years rather than 25. The impact is that while monthly costs will be reduced, the total repayment cost of the mortgage will be higher, and it will take an extra five years to become mortgage-free.

This support option may either be offered on a fixed term, such as for six months or be indefinite. In the latter scenario, the onus may fall on you as the borrower to let your lender know if you would like to revert to the original loan term at some point.

Mortgage borrowers may also find lenders require them to pass an additional affordability assessment each time they adjust the term of their mortgage.

Locking in Fixed Rates Up to Six Months in Advance

Borrowers with a fixed-rate mortgage agreement may find it difficult to know the best way forward with the substantial increases in the base rate causing higher borrowing interest across the board. The charter requires participating lenders to offer confirmed fixed rates in advance of a current agreement ending.

There is also the option of requesting a revised offer up to two weeks before the start of the new term if a better interest rate becomes available.

Eligibility for Mortgage Charter Support

The Mortgage Charter applies to any applicants or borrowers with a residential mortgage. However, mortgage providers that are not signed up to the charter may have some discretion about the assistance or options they can propose.

Landlords with buy-to-let mortgages do not have a predefined right to request these support options, although a lender may be happy to discuss similar solutions, such as extending the term of a mortgage agreement to avoid a borrower falling behind.

Other exceptions apply to borrowers who have already defaulted on their mortgage payments, have a second-charge mortgage product, or are currently paying their mortgage on an interest-only basis.

Should you request any of the support introduced in the charter, there is an assurance that this will not affect your credit score. Homeowners also cannot be exposed to the risk of repossession, under new clauses within the charter, within 12 months of the first missed payment on their mortgage debt.

Dealing With the End of a Fixed-Rate Mortgage Agreement

If you are paying a mortgage agreement on a fixed interest rate that is due to end in the near future, and your lender is a participant in the charter, you can contact them up to six months in advance to secure an offer. A confirmed rate will be ‘locked in’, which means the lender cannot change it unless you request a revised agreement or different terms.

Borrowers can then revisit the quotation process up to two weeks before they are scheduled to switch over to the new rate to see whether a reduced interest offer is available.

Those with mortgages through lenders who are not participating in the Mortgage Charter may still be able to request support, given that new FCA rules apply to the entirety of the mortgage market, irrespective of whether the lender has chosen to sign up.

Therefore, you should still be able to:

  • Reduce mortgage payments by switching to an interest-only basis or taking a repayment holiday for up to six months.
  • Request an extension to your mortgage term, and then reverse or adjust the length of the extension within six months.

If you need any assistance working through the terms of the Mortgage Charter, understanding how they might apply to your mortgage borrowing situation, or deciding the best way forward to manage increasing mortgage repayment costs, please contact the Think Plutus team at any time.

Written By

Dave Relfe MCSI DipPFS CertSMP

Dave is the principal mortgage and protection adviser at Think Plutus. He has more than 15 years of experience in financial services and holds the Diploma in Financial Planning from PFS, Investment Advice Diploma from CISI, and the Certificate in Advanced Mortgage Advice from the Society of Mortgage Professionals. He has devised the unique Think Plutus approach that has helped many clients, from first-time buyers to buy-to-let investors and property developers, to people looking to remortgage or release equity from their property. Connect with Dave on LinkedIn.

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