Recently, the UK government has decided to create a new ‘Mortgage Charter’ with help from the Financial Conduct Authority (FCA). This charter aims to help buyers reduce their mortgage repayments amid rising costs and soaring interest rates.
Many lenders have signed up to this scheme in full, and others have agreed to implement more general strategies to support buyers. The charter has support from major lenders such as Lloyds, Barclays, Santander, Nationwide and more. It’s worth checking your lender’s website to find out the specific options available to you.
This article explains the pros and cons of the Mortgage Charter, who is eligible, and how it all works.
Why has a new Mortgage Charter been agreed?
Primarily because of the cost-of-living crisis and soaring interest rates.
Whenever you take out a mortgage, lenders assess whether or not you can afford it, and they’ stress test’ these deals by considering interest rate rises. For example, since 2013, rates have been tested to see if they would remain affordable if they reached 7%. However, the current rates have crept ever closer to this figure, and are predicted to peak at 6.5% by May 2024 before falling.
This means the government and lenders have had to find solutions to help buyers. The sky-high rates could easily have led to a wave of repossessions and fewer buyers. The government, FCA and major lenders agreed on the new Mortgage Charter to prevent this.
Many lenders already have extensive support systems in place. However, the new charter standardises these strategies across many more lenders. That way, it assures buyers that they can expect a certain level of service across the board so they won’t forced to leave their home.
What parts of the mortgage charter have all lenders agreed to?
There are two levels to the charter: some guidelines all lenders have agreed to, and further guidelines have been agreed to by a select group of lenders.
Here is that all have agreed to:
- Credit-friendly support - People can contact their lenders for advice without worrying that this might affect their credit score.
- Mortgage switching support - Customers can choose a new mortgage deal once theirs expires, without affordability checks (as long as they are up to date with payments).
- Offering timely advice - Lenders agree to provide timely information to help customers transition to a new deal if their current rate has nearly ended.
- Tailored support - Lenders agree to give customers access to trained support staff if they struggle with their mortgage. For example, customers may be able to extend their mortgage term, switch to an interest-only deal or temporarily defer payment.
What have some lenders signed up for?
Those who have specifically signed the charter have agreed to operate in the ways defined below:
- A longer time before repossession - Borrowers won’t have their home repossessed without their consent when it’s less than a year since their first missed payment (except in exceptional circumstances).
- Fixed-rate deals offered in advance - Buyers whose fixed-rate term is soon to end have the chance to ‘lock in’ a new deal up to six months in advance. Even better, they can switch to another deal (if they want) until the time when their current term ends.
- Flexibility with repayments – The deal means that lenders will allow customers to switch to interest-only deals for six months, or extend their mortgage term to lessen their monthly payments for six months.
How does it work when you switch to an interest-only deal with the Mortgage Charter?
The Mortgage Charter lets you switch to an interest-only mortgage for a limited period of time (up to 6 months). This will lower your mortgage repayments in the short term. However, the amount you pay will be higher overall because you’ll only pay interest during the 6 months of support. It’s also important to note that you won’t need to take a new affordability test to apply, and the outcome won’t affect your credit score either.
Once the 6-month term has ended, you will return to your original mortgage payment plan. However, you’ll be paying back more every month because you’ll need to pay off the same balance over a shorter period of time.
For this reason, it’s a good idea to use a Mortgage Charter calculator to make sure you can afford the increased payments after the 6-month, interest-only period.
What happens if you extend your mortgage term with the Mortgage Charter?
Another way to manage your repayments is to extend your mortgage term with the Mortgage Charter. This means you’ll pay the same balance over a longer period of time, though you will end up paying more in interest.
That said, the charter allows you to change your mind for the first 6-months after you’ve agreed to extend your term. There are three things you can do:
- Go back to your original term - If you do this, the repayments you make will be higher than before you chose to extend the term.
- Revise the term extension - You can adjust the extended repayment term. For example, if you went from a 15-year repayment term to a 25-year term, you could reduce it to 20 years instead.
- Accept it - You can continue on the extended mortgage term.
Once again, if you choose to extend your mortgage then you won’t be subject to a new affordability check, and your credit score won’t be affected either.
Are there any ‘cons’ to the Mortgage Charter?
There are a couple of ‘cons’ to be aware of. The charter provides solutions designed to help in a crisis and assist borrowers in the short term. However, if you extend your term or switch to an interest-only deal, you will repay more in the long term.
Equally, you will have higher repayments after your interest-only term is up. That’s because you’ll need to pay back the same amount of money in a shorter space of time because of the 6-month interruption.
What will you need to apply?
Before you apply, it’s a good idea to have all the relevant information to hand. This will speed up the process and help you access the help you need more easily.
Here is the information you’ll need to give your lender when applying:
- Your mortgage balance
- How much of your mortgage term remains
- Your repayment plan
- The interest rate you are paying
- Agreement from everyone on the mortgage to apply
- For a mortgage extension – You will need to state the amount of people on the mortgage, their planned retirement ages, and date of birth.
How do I know if I can afford an interest-only mortgage or mortgage extension?
Since these solutions help you in the short term, you’ll need to determine whether you can afford the additional interest or shorter repayment period in the long term.
To do this, several suppliers have created ‘Mortgage Charter calculators’. These online tools (like this and this) allow you to input your repayment information, interest rates, monthly repayments etc., so you can understand the costs accurately.
Can someone apply for interest-only support and a mortgage extension?
No. You will have to choose which of these options suits you best. To work this out, it’s best to contact your lender and discuss this with them directly. You can use a Mortgage Charter calculator to help you see affordability and viability at a glance.
Does the mortgage charter help those already in arrears?
Technically, lenders who have signed up for the charter are not obliged to help if you are already in arrears. However, it is absolutely worth asking your lender for help as soon as possible. Most of the time, they will look at your personal circumstances and will be able to come up with a plan to help you keep your home.
For example, they may let you switch to a part payment plan, interest-only mortgage, or allow you to extend your repayment period.
Who is eligible for help under the mortgage charter?
Provided that your lender has signed up to the scheme, there are several rules about who can benefit from the scheme. More specifically, if you would like to switch to interest-only payments or want to extend your term, you’ll have to meet these criteria:
- You will need a residential mortgage on a UK property.
- You must be up to date with mortgage repayments.
- Your mortgage must not be interest-only.
- You can’t have missed payments of more than £50 in total (or more) across your mortgage accounts.
- You can only extend your term until your planned retirement age. You can’t extend it beyond the point where the oldest applicant reaches 70 years old.
- You’ll need joint permission if applying for help with a joint mortgage.
- You can’t apply if you’ve previously used the Mortgage Charter to extend your term or move across to an interest-only deal.
- Your mortgage cannot be a part interest-only deal, part repayment deal, or capital repayment mortgage.
- To apply for a Mortgage Charter deal, you must pay your mortgage by direct debit. If you pay by a different method, then you’ll need to switch to direct debit to take advantage of the deal.
Can you get Mortgage Charter support for several mortgages?
Yes, you can, though you will need to apply for each one separately. This is true even if you have a couple of mortgages on the same property or multiple properties.
Does the Mortgage Charter apply to the whole of the UK?
Thankfully, yes. Everyone eligible under the general criteria can access the Mortgage charter service. This is true whether you live in England, Scotland, Wales and Northern Ireland.
If you’re looking for a way to reduce your mortgage repayments in the short term, it’s a great idea to explore the new options under the Mortgage Charter and speak with your lender or your mortgage broker.