Early insights for Lenders: The Mortgage Charter

On 26th June, following discussions between the Chancellor, the FCA and CEOs of the UK’s largest mortgage lenders, covering around 85% of residential mortgage lending in the UK, a set of standards (the ‘Mortgage Charter’) was agreed to support customers.

Signatories to the Charter have agreed that, from adoption:

• a borrower will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.

• customers approaching the end of a fixed rate deal will have the chance to lock in a new deal up to six months ahead. They will also be able to manage their new deal and request a better like-for-like deal with their lender right up until their new term starts, if one is available.

In addition, signatories to the Charter will permit customers who are up to date with their payments to:

• switch to interest-only payments for six months, or

• extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within 6 months.

Both temporary options can be selected by a customer without undertaking a new affordability check or affecting their ‘credit score’, by contacting their lender. To support this, the FCA have published PS23/8 (Mortgage Charter: Enabling Provisions), amending the Mortgage Conduct of Business (MCOB) Rules to allow these limited exemptions from pre-existing affordability requirements.

The new options are to be made available to borrowers, in addition to pre-existing forbearance tools which remain subject to lenders’ case-by-case assessment criteria – some of which may be subject to affordability assessment and could impact credit files.

Despite the Charter and changes to MCOB, the FCA still require lenders to ensure customers understand the features, costs, and benefits of the option they choose, before the change takes effect. Where a customer is considering a temporary variation to their contract, lenders will need to disclose (via illustrations) both the initial reduced payment amount, and what the subsequent higher payments will be when the contract reverts back. Lenders still need to be prepared for borrowers who cannot afford their current monthly payments and temporarily switch to either of these arrangements, and may be unable to afford payments at an increased level after the six-month period. In reality, these measures effectively assume that the current inflationary environment, including rising interest rates, will peak and begin to subside soon. This seems optimistic at the moment, suggesting that the six-month period could be further extended at some point. Higher interest rates and the inherent affordability challenges are set to be more permanent long-term features of lending.

We are currently supporting lenders to use analytics to better understand the ‘Cost of Living Crisis’, evolving their strategies to reflect potential impact upon customer expenditure when assessing affordability – both for new lending and existing deals approaching their maturity date. Please get in touch if you would like to hear more.

Links:

• Chancellor agrees new support measures for mortgage holders – GOV.UK (www.gov.uk)

• PS23/8: Mortgage Charter: enabling provisions (fca.org.uk)

Footnote:

Prior to the publication of the Charter the FCA were already consulting on updating the Handbook, namely the consumer credit (CONC) and mortgages (MCOB) sourcebooks, to make the Tailored Support Guidance (TSG) permanent. The TSG was issued in response to the COVID-19 pandemic to make clear how lenders could support customers in financial difficulty.

Some of the relevant changes to MCOB, include updating MOCB 13 Arrears, payment shortfalls and repossessions: regulated mortgage contracts and home purchase plans to be made relevant to customers at risk of missing a payment as well as those in arrears, and increasing the number of proposed forbearance options. The FCA also adds in additional references to the Consumer Duty, and under the outcome of avoiding foreseeable harm to retail customers, they note that some proposed forbearance, including capitalisation of shortfalls, or temporary payment reduction which result in increased balances may not be in the best interest of some customers. To support this goal, the FCA propose to make it explicit that lenders, when considering what may be appropriate in a customer’s individual circumstances, must take into account the effect of any potential arrangements on the customer’s overall balance.