The Financial Conduct Authority (FCA) has published its confirmed guidance to set out how mortgage lenders can help customers worried about or already struggling with their mortgage payments because of the rising cost of living.
In December, the FCA published draft guidance which set out the flexibility firms have when providing forbearance to those who need it, and the scope firms have to vary contract terms for other borrowers who want to reduce their monthly payments.
The FCA received 27 responses from a range of stakeholders including one consultancy, 14 consumer representatives and 12 firm representatives.
The now-published guidance has been put together to protect existing mortgage borrowers who are struggling to make payments due to increases in the cost of their mortgage as well as the wider impact of the rising cost of living.
Taking immediate effect, it lists out the tools that lenders can use to support customers in different circumstances.
It covers options such as extending the term of their mortgage, switching to interest-only for a temporary period, moving to a different interest rate or making reduced monthly payments for a temporary period.
In the updated guidance, the FCA says that if a customer indicates that they are experiencing or reasonably expect to experience payment difficulties due to the rising cost of living, firms should offer prospective forbearance to enable them to avoid, reduce, or manage any payment shortfall that would otherwise arise.
It explains that firms may offer payment concessions where they agree to accept less than the contractual monthly instalment, but they may also offer contract variations such as term extensions and temporary switches to interest-only.
Alongside this, the FCA highlights that firms must act honestly, fairly and professionally in accordance with the best interests of their customers.
It also sets out guidance for customers that do not require forbearance but want to reduce their monthly payments.
In this scenario, the FCA says firms may offer a range of contract variations to support borrowers who would like to reduce their monthly payments.
These include interest rate switches, term extensions and variations to interest-only.
Alongside the guidance, the FCA found that in addition to those households already behind on payments, 356,000 mortgage borrowers could face payment difficulties by the end of June 2024.
This is down 214,000 from the 570,000 borrowers the FCA previously estimated in September last year due to changes in market expectations of the Bank of England (BoE) base rate.
Data found that those moving from a fixed rate could pay £340 a month more on average.
Commenting on the guidance, FCA executive director of consumers and competition Sheldon Mills says: “Our research shows most people are keeping up with mortgage repayments, but some may face difficulties.”
“If you’re struggling to pay your mortgage, or are worried you might, you don’t need to manage alone. Your lender has a range of tools available to help. Get in touch as soon as you have concerns, don’t wait until you’re about to miss a payment before doing so. Just talking to them about your options won’t affect your credit rating.”
Quilter mortgage expert Charlotte Nixon states: “The FCA has revealed a suite of guidance for lenders with customers that are struggling to keep up with payments. This is largely around offering customers forbearance options.”
“Forbearance refers to a temporary agreement between a lender and a borrower in which the lender allows the borrower to temporarily reduce or pause their payments on a loan. Forbearance may be granted for various reasons such as financial hardship, illness, or other unexpected circumstances that may prevent the borrower from making their regular loan payments.”
“This might include putting a customer on an interest only mortgage for a period of time to reduce their monthly payments.”
“If you are a borrower experiencing financial difficulties due to the rising cost of living, it’s important to contact your lender and discuss your situation with them. The lender may be able to offer you a variety of options to help you manage any payment shortfalls that may arise.”
“It’s also important to keep in mind that while forbearance may provide temporary relief, it may also have long-term implications on your credit score and the total amount you’ll end up paying on your loan.”
Dashly head of mortgages Iain Swatton comments: “Any support that can be offered to people coming off their existing low rates now, at a time when energy rates have spiralled, mortgage payments have gone up and the cost of living has increased, will be most welcome.”
“We saw similar measures during Covid where support was put in place to ease the burden for those that needed it most by taking a payment break with their mortgage. This came without it impacting on your credit arrears and meant that if you are in financial difficulty, through situations that are not of your own making, you weren’t being penalised.”
“The last thing lenders want is for homeowners to go into arrears or have to default on their mortgage. Repossession is always the absolute last resort once all other options have been explored. Most lenders will work with the homeowner to find a solution whether that’s lowering payments and extending the term or switching to an interest-only option.”
AJ Bell head of personal finance Laura Suter adds: “The outlook for homeowners is bleak, but not as bleak as it was. On top of the people who have already missed a mortgage payment, the regulator thinks another 356,000 homeowners are at risk of falling behind by the end of June 2024. This means more than 700 homeowners a day are at risk of missing a mortgage payment and falling into arrears.”
“But the good news is that this is a significant drop on the FCA’s previous expectations – the previous estimate expected 570,000 borrowers to hit financial problems by the end of June next year. We have falling interest rate expectations to thank for that, as they are now expected to peak at 4.5% rather than 5.5%, meaning those coming to re-mortgage later this year won’t face such eye-watering increases in their repayments.”
“There is no hiding from the fact that the mortgage market is a terrifying place for the 1.4m homeowners coming off a cheap fixed-rate deal onto far higher rates this year. While average mortgage rates have dropped since the aftermath of the disastrous mini-Budget last year, they are still significantly higher than the rates many homeowners are on.”
“As these figures lay bare, for many homeowners the increase in costs will make their mortgage unaffordable, particularly in light of rising costs almost everywhere else in their spending.”
“Younger people and those living in more expensive areas, such as London and the south-east, are at the highest risk of struggling to make payments, because they often have a toxic combination of having borrowed up to the max and not having sufficient savings to help bail them out.”
“The unaffordable nature of getting on the property ladder in London means that many buyers have funnelled all of their money into buying a home, and have left nothing to fall back on.”
“The FCA wants mortgage lenders to up their game when it comes to supporting customers who are struggling with repayments, offering things like payment holidays, reduced repayments for a period, switching to interest-only or extending the mortgage term to cut monthly costs.”
“It also wants to bust some myths for those struggling with repayments, reassuring them that enquiring about help won’t have a negative impact on their credit file and that lenders should offer tailored support.”
