Let’s be clear: the new Mortgage Charter, signed by 32 lenders, is a welcome step to support the growing number of UK households with concerns about their ability to meet their mortgage commitments.
But what does it actually entail?
Alongside the strengthening of existing forbearance support for mortgage holders, the signatory lenders go further, providing respite from eviction for 12 months for the worst-affected borrowers.
Many lender systems already have limitations on the scope of post-contract variations that can be undertaken by advisers
The charter gives customers greater flexibility to switch to a new deal six months ahead of expiry, and guarantees a switch to a better like-for-like product, if available, right up until the date a new term starts.
For customers who are up to date with payments, there’s also an option to temporarily switch to interest-only for six months, or to extend the mortgage term with the ability to revert to the original term within a six-month period, in both cases without impacting borrower credit scores.
On the face of it, these new commitments are welcome additions. However, dig a little deeper and, as often happens, potential challenges and unintended consequences begin to emerge.
At a time when good-quality financial advice is most needed, our profession is pivotal to ensuring the avoidance of foreseeable harm
A six-month product-switch window maximises the chance a customer may benefit from a lower rate before the switch completes. However, it also lengthens the window of advice, meaning advisers are likely to be touching a product transfer transaction multiple times before a switch completes — a right now enshrined within the charter for customers of the signatory lenders.
Although this is a good customer outcome, it will see advisers potentially re-writing the same product transfer case several times in six months for the same procuration fee.
Added complexity
For clients worried about affordability, a temporary switch to interest-only or a term extension will provide a brief window of relief to get on top of finances, granting more time to brace for the financial impact of a higher interest rate environment.
However, many lender systems already have limitations on the scope of post-contract variations that can be undertaken by advisers, including changes in term and repayment method; and that’s before the added complexity of borrowers being able to unwind these choices within a six-month window.
Unintended consequences begin to emerge
While advisers are eager to support the many thousands of customers anxiously considering their options, it’s not yet clear that the required systems, technology and controls are in place to enable them to maximise the new flexibility created by the Mortgage Charter.
In instances where customers requiring interest-only or term extensions must go back to lenders directly, market capacity to support customers is significantly reduced, and intermediary income is impacted. Both are unfortunate, and unwelcome, unintended consequences.
Finally, although calls have been growing for the lender community to support advisers and clients by providing reasonable and fair notice on product withdrawals, a word of caution on the potential unintended consequences for borrowers also arises.
On the face of it, these new commitments are welcome additions
While more notice is always preferable, what we don’t want to see is lenders pricing potential increases in swap rates into new products to provide a ‘buffer’ to keep offering rates for longer. This could lead to higher rates than necessary for customers at a time when many are already struggling with affordability.
Central to any solution is the requirement for clear, transparent and timely communication with the intermediary market, supported by functioning systems and withdrawals within office hours. Together, this will ensure that customers can benefit from both the reassurance of quality, regulated advice along with the best rate possible from their lender — without the stress and wasted time of a last-minute dash.
A six-month product-switch window will see advisers potentially re-writing the same product transfer case several times in six months for the same procuration fee
As with our response to the pandemic, the mortgage sector has again shown remarkable speed and readiness to do the right thing to support customers. However, with the Consumer Duty imminent, we need to learn from the past and ensure that advisers, as those who are often first-line responders in any financial crisis, are provided with the right tools for the job.
At a time when good-quality financial advice is most needed, our profession is pivotal to ensuring the avoidance of foreseeable harm.
Alex Beavis is group director – Mortgages & Protection at Sesame Bankhall Group
This article featured in the July/August 2023 edition of MS.
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