"The government needs to provide a clearer and more nuanced strategy"
The current reliance on forbearance measures to help mortgage borrowers is doing more harm than good, according to financial services software provider Target Group.
The company is calling on the government to help provide clearer guidance to lenders, with the UK mortgage market trying to weather its worst storm since the 2008 global financial crisis.
Following Chancellor Jeremy Hunt’s mortgage summit last month, major lenders have agreed to a package of forbearance measures to support borrowers who are struggling to meet their repayments.
This morning I met the UK's principal mortgage lenders and @theFCA to agree extra support for people struggling with mortgage repayments.
— Jeremy Hunt (@Jeremy_Hunt) June 23, 2023
These measures should offer comfort to those who are anxious about high interest rates, and support for those who do get into difficulty. https://t.co/lEyvAKS88T
Katie Pender (pictured), managing director at Target Group, however, believes the government’s overreliance on forbearance measures meant for short-term periods is “actually making things worse.”
“The problem is that Jeremy Hunt’s plan is using short-term measures to deal with what is likely to be a mid-term problem,” Pender pointed out. “Forbearance is a short-term solution designed to meet issues, such as a job loss or a change in circumstance. It is not a mid-term solution to systemic affordability issues triggered by rising interest rates.
“Overreliance on forbearance will come with a cost for the mortgage market as a whole and homeowners.”
Pender explained that paying interest only will prolong the term of peoples’ mortgages, costing them a lot more over the long term. She added that it will also affect their credit score, which will harm their future borrowing opportunities and exacerbate affordability shortfalls further.
“In some respects, the market is in a catch-22,” she continued. “Do we try to prevent repossessions, although it’s clear that many people will now not be able to afford their homes, or do we hurt homeowners further down the line by propping up arrangements that may actually be unsustainable?”
Martin Lewis, founder of MoneySavingExpert.com, however, pointed out that with the unprecedented steep rise in mortgage rates, the most important thing we can focus on right now is appropriate, flexible forbearance measures.
“While the Bank of England’s aim is intended to squeeze people’s disposable incomes, no one wants people’s lives to be ruined by arrears and repossessions – and that is the urgent protection we need to focus on,” he said.
Hunt also stressed that the measures should offer comfort to those who are anxious about high interest rates and support for those who get into difficulty.
“Tackling high inflation is the Prime Minister and my number one priority,” he stated. “We are absolutely committed to supporting the Bank of England to do what it takes. We know the pressure that families are feeling. That’s why we’ve introduced big support packages around £3,000 for the average household this year and last.
“But we will do what it takes, and we won’t flinch in our resolve because we know that getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and on businesses.”
Nevertheless, Pender is adamant that the government needs to provide a clearer and more nuanced strategy. Otherwise, the problem will just re-emerge, she added.
“We can’t do a 90s style subsidy – the market is totally different now,” Pender said. “What’s needed is tax. No one wants to be paying tax, but to curb inflation, we need to make people think twice about spending. In my view, this means taxing non-essentials.
“Realistically, we need to start somewhere and stop people spending. Surplus from this could then be used to help the very poorest keep their homes.”
Pender also mentioned the need to discuss affordability stress-testing, saying that a lot of households have taken on eye-watering levels of debt, which is now really hurting them.
“After 2008, the industry learned its lesson, but it’s time for another review – including looking at schemes such as Help to Buy, where we’re encouraging people with little capital to take on alarming levels of debt,” she stated.
“Watching and waiting is over. We need to act now to help protect the market.”
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