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The Financial Conduct Authority (FCA) has released an approved mortgage guide outlining how mortgage lenders can help customers who are worried or are already struggling with mortgage payments due to the rising cost of living.
In December, the FCA released draft guidance outlining the flexibility firms have in granting indulgence to those who need it, as well as options for firms to modify contract terms for other borrowers who want to reduce their monthly payments.
FCA received 27 responses from a range of stakeholders, including one consulting company, 14 consumer representatives and 12 firm representatives.
The published guidance was written to protect existing mortgage borrowers who are having difficulty making payments due to the rising cost of their mortgages, as well as the broader impact of the rising cost of living.
It lists the tools lenders can use to support clients in a variety of circumstances.
It covers options such as renewing a mortgage, switching to an interest rate for a temporary period, switching to a different interest rate, or temporarily reducing monthly payments.
The updated FCA guidance says that if a customer indicates they are experiencing or reasonably expect to experience payment difficulties due to cost of living increases, firms must offer an affordable deferral to allow them to avoid, mitigate or manage any payment shortfall. what would have happened otherwise.
It explains that firms can offer payment concessions if they agree to accept less than the agreed monthly payment, but they can also offer contract options such as term extensions and a temporary switch to interest-only payments.
Along with this, the FCA stresses that firms must act honestly, fairly and professionally in accordance with the best interests of their clients.
It also outlines recommendations for clients who do not require indulgence but want to reduce their monthly payments.
In this scenario, the FCA says firms can offer a range of contract options to support borrowers who would like to cut their monthly payments.
These include interest rate changes, renewals, and interest rate changes.
Along with guidance, the FCA found that, in addition to those households already in debt, 356,000 mortgage borrowers could find it difficult to pay by the end of June 2024.
This is 214,000 less than the 570,000 borrowers previously assessed by the FCA last September due to changes in market expectations for the Bank of England base rate (BoE).
The data showed that those who opt out of the flat rate could pay an average of £340 more per month.
Commenting on the guidance, FCA’s executive director of consumer and competition protection, Sheldon Mills, says: “Our research shows that most people pay their mortgages, but some may struggle.”
“If you’re struggling to pay your mortgage or worried you might, you don’t have to go it alone. Your lender has a number of tools to help. Contact us as soon as you have problems, don’t wait until you’re about to miss a payment before doing so. If you just tell them about your options, it won’t affect your credit score.”
Quilter mortgage expert Charlotte Nixon says: “The FCA has provided a set of recommendations for lenders whose clients are struggling to keep up with payments. This is mainly due to offering customers options for patience.”
“Abstention refers to a temporary agreement between a lender and a borrower in which the lender allows the borrower to temporarily reduce or suspend payments on a loan. A deferment may be granted for a variety of reasons, such as financial hardship, illness, or other unforeseen circumstances that may prevent the borrower from making regular loan payments.”
“This may involve giving the client an interest-bearing mortgage for a specified period of time to reduce their monthly payments.”
“If you are a borrower experiencing financial hardship due to the rising cost of living, it is important to contact your lender and discuss your situation with them. The lender can offer you a variety of options to help you deal with any payment shortfall you may have.”
“It’s also important to remember that while abstaining may provide temporary relief, it can also have long-term consequences for your credit score and the total amount you end up paying on the loan.”
Ian Swatton, head of mortgages, comments: “Any support that can be offered to people getting out of the current low rates now, at a time when electricity rates are skyrocketing, mortgage payments have risen and the cost of living has risen, will be the most efficient. Welcome.”
“We saw similar measures during Covid when support was introduced to ease the burden on those who needed it most by taking a break from mortgage payments. This happened without any impact on your debt on the loan and meant that if you experienced financial difficulties due to situations that were not created by you, you were not punished.
“The last thing lenders want is for homeowners to owe or default on their mortgage. Taking back possession is always the last resort when all other options have been explored. Most lenders will work with the homeowner to find a solution, whether it’s lowering payments and extending the term, or switching to an interest-only option.”
Adds AJ Bell head of personal finance Laura Suter: “The outlook for homeowners is bleak, but not as bleak as it used to be. The regulator believes that in addition to people who have already missed mortgage payments, by the end of June 2024, another 356,000 homeowners are at risk of not paying their mortgages. with delay”.
“But the good news is that this is a significant decline from previous FCA expectations — a previous estimate had expected 570,000 borrowers to be in financial trouble by the end of June next year. We have this reduction in interest rate expectations to thank, as they are now expected to peak at 4.5% rather than 5.5%, meaning that those who choose to remortgage later this year will not face such an impressive increase in their payouts.”
“There is no hiding the fact that the mortgage market is a terrible place for the 1.4 million homeowners who are ditching a cheap fixed-rate deal this year and getting much higher rates. While average mortgage rates have come down since last year’s disastrous mini-budget, they are still significantly higher than the rates many homeowners live on.”
“Because these numbers are low, for many homeowners, the increase in spending will make their mortgage unaffordable, especially in light of rising costs in almost every other area of their spending.”
“Young people and those who live in more expensive areas such as London and the South East are most at risk of running into debt repayment difficulties because they often have a toxic mix of oversaving and undersaving. help save them.”
“The inaccessible nature of climbing the real estate ladder in London means that many buyers have invested all their money in buying a home and have nothing to fall back on.”
“The FCA wants mortgage lenders to step up their game when it comes to supporting clients struggling with repayments by offering things like payment holidays, reducing repayments during a period, switching to interest-only payments, or extending mortgages to cut monthly expenses. “.
“He also wants to bust some myths for those struggling with repayments by reassuring them that asking for help won’t have a negative impact on their credit file and that lenders should offer personalized support.”
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