Expert reminds borrowers to "get to grips with what is on the table" before they dive in
Last month, the UK government announced a new Mortgage Charter, following meetings with principal mortgage lenders and the Financial Conduct Authority (FCA).
The lenders agreed to make certain commitments to support their regulated residential mortgage borrowers at a time of rising interest rates, while the FCA has made rule changes to support these commitments.
The highlight of the new Mortgage Charter is that lenders who signed up to the charter are now able to offer borrowers a switch to interest-only payments for six months and an extension to their mortgage term to reduce their monthly payments, with the option to switch back within six months. Both can now be offered without an affordability check.
“For those struggling with payments due to higher interest rates, this could offer some much-needed relief,” said Ben Thompson (pictured), deputy chief executive at Mortgage Advice Bureau (MAB).
He, however, reminded borrowers that before they dived in, it was important to get to grips with what was on the table and consider all the pros and cons.
Thompson said that having the option to switch to an interest-only deal for up to six months would definitely help mortgage holders reduce their payments, as they would only be covering the interest on their loan.
“However, be aware that you won’t be making a dent in the amount you’ve borrowed,” he pointed out. “When you come off your interest-only deal, it’s likely that your repayments will increase to cover the reduced monthly payments for six months.”
Thompson advised mortgage customers to map their income and outgoings now, and where they think they might be in six months, before deciding to switch onto this deal.
“There is the potential that some short-term relief could mean more financial pain come the New Year,” he said.
Thompson added that increasing the length of the mortgage would reduce monthly repayments, with the loan’s repayments simply stretched over a longer amount of time. However, he said this would also ultimately increase how much borrowers paid back in the long term, due to the additional years of interest that they paid.
The MAB deputy CEO also emphasised the importance of planning ahead as mortgage holders might save more by monitoring the market early.
“Mortgage borrowers approaching the end of a fixed rate deal can lock in a deal up to six months beforehand,” he said. “So, if you are coming to the end of a deal at Christmas, now is the time to start looking at your options. With the mortgage market constantly changing, being clued up on your options is the best place to be. Speak to your broker to see what your options are.”
Thompson also said that mortgage customers must check with their lender, not only to see if they had signed up to the Mortgage Charter, but also to learn about the specifics as each lender had slightly different rules around who was eligible for support.
“If you’re unsure of where you stand, speak to your lender, as they will be able to guide you on what your options are,” he advised.
“If you’re uncertain about the best route to take or are worried about your mortgage payments, you should speak to a mortgage broker. Their expert knowledge can help run you through your options in terms of what might work best with your personal circumstances.”
Any thoughts on the new Mortgage Charter? Tell us by leaving a comment in the discussion box at the bottom of the page.
