UK Banks Mortgage Charter: Does it go far enough?
With the Bank of England orchestrating the steepest increases in interest rates in history, mortgage borrowers have been crying out for help. Failure to get support could force many homeowners who are finding their mortgages unaffordable to resort to selling their homes. The government responded by getting the largest mortgage lenders and UK finance to agree to a Mortgage Charter.
What is the aim of this Mortgage Charter?
The Charter aims to help and support borrowers through this difficult period of adjusting to meaningfully higher mortgage rates.
Who has signed up?
Lenders, including the biggest banks and building societies, representing approximately 90% of the mortgage market are signatories to the Mortgage Charter. Borrowers not covered by these signatories would not benefit from it. Instead, they would have to rely on the support measures each lender offers to borrowers facing difficulty in meeting their mortgage payments.
What does it achieve?
It helps people on a mortgage who have kept up to date on their mortgage payments to
- Remain in their home for a period of one year from their first missed payment.
- Switch from a repayment mortgage to an interest-only mortgage for a period of 6 months or
- Extend their mortgage term to reduce their monthly mortgage payments along with the option to revert to their original term after contacting their lender.
What does it not achieve?
By converting the repayment mortgage to an interest only mortgage, by definition, principal payments are excluded. This provides temporary relief to borrowers by reducing their monthly mortgage payments for a period of 6 months. After these six months are over, unfortunately they would be on their own once again.
Increasing the mortgage term also helps reduce monthly mortgage payments, although one needs to be aware that the total interest payment they would make over the life of the mortgage would increase due to the longer term.
Unless mortgage rates come down significantly at the end of these six months, owners would be in the exact same situation of not being able to afford the mortgage. The charter does not give them a solution they can rely on for the medium term of two to five years to tide over the mortgage crisis.
So, are mortgage rates headed lower soon? … erm… not so fast!
Our assumption, and the view of multiple economists, is that inflation, currently at 6.7% will be coming down to the Bank of England’s target of 2%, but only sometime in 2025 or 2026. The implication is that while the Bank of England is close to the end of its interest rate hiking cycle, they are expected to keep rates at an elevated level for an extended period. Consequently, mortgage rates will not be coming down to affordable levels fast enough.
Why has the government not done more?
To provide any kind of relief to homeowners on their mortgages, could be perceived as being
- Unequitable There are renters and first-time buyers who may not have got onto the property ladder yet. To add to that, homeowners are typically believed to be wealthier than renters. A scheme solely aimed at mortgage borrowers looking to reduce their mortgage rates could be viewed as making the rich richer and increasing the wealth disparity.
- Too expensive As a reference point, the government provided a price cap for all households and small businesses in the UK when energy prices shot up in 3Q of 2022 through energy bill support and relief schemes. This temporary relief cost the Treasury roughly £40bn. Lowering mortgage costs for a period of 1 year or more to levels prior to the mortgage hike for ~3m households that need to fix their new rates or have done so already could cost the Treasury upwards of £10 billion. With the UK debt to GDP ratio at 100%, partly due to the generous Covid relief and Energy bill support schemes, the Treasury is not in a financial position to afford another multi-billion-pound support scheme.
In short, the government’s hands are tied.
What could the solution have been?
An ideal solution would have been the Bank of England (BOE) being able to commit to reducing rates in a noticeably short timeframe. Despite raising rates multiple times, inflation has been running rampant for far longer than anticipated. BOE, as a result, does not have that flexibility.
Another solution would have been for the government to subsidise individual homeowner’s mortgage payments, which as discussed earlier, may not be equitable and would be too costly.
An alternative end to the story?
With troubled borrowers already finding it challenging to meet the increased mortgage payments, they need a solution that does not add to their debt burden. The solution needs to provide them regular cashflow to make good on their increased mortgage payments. This is where a timely solution from Pauzible — a home equity investment comes in. It helps pay the increased mortgage payment for homeowners in return for a share in the homeowner’s home equity. It is a unique solution that can potentially play a critical role in securing the financial future for homeowners during a ‘mortgage crisis’.
