As the Bank of England continues to increase their base rate to try and combat high inflation, rising from 0.1% in December 2021 to 5.25% presently, mortgage rates have followed a similar trajectory.
This means that first-time buyers or those needing to renew their mortgage will now have to deal with much higher rates compared to the low rates which have been available since 2008. This means more expensive monthly payments for homeowners, which for some can result in anxiety and even have detrimental consequences.
So what has been done to combat this problem and help rising costs for borrowers? This is where the Mortgage Charter steps in. The Mortgage Charter is a concept that has been agreed between the government, the Financial Conduct Authority and the majority of lenders to offer support for UK mortgage holders.
As part of the Mortgage Charter, you can apply to reduce your monthly mortgage payments by switching to interest-only for 6 months or extending your mortgage term, if you have a repayment or part-and-part mortgage. It offers help to people who are struggling with their repayments, and you can apply for either of these options without undergoing an affordability check.
However, if you’re able to carry on paying your monthly mortgage repayments as they are, then this is the better option. If you choose one of the Mortgage Charter options, the overall cost of your mortgage will be higher as there will be more interest to pay, plus you’ll have higher repayments when you return to your original mortgage term.
Why has the Mortgage Charter been introduced?
When you take out a mortgage, your lender will assess your affordability to work out what you can afford to borrow at the present moment. Since 2013, lenders have also been required to assess whether borrowers would still be able to afford repayments if rates were to rise to 7%.
In circumstances where people are having trouble with repayments, lenders have measures in place to offer help, however not all lenders have the same options, and some may negatively affect your credit rating.
Since a mortgage is repaid over many years in most cases, borrowers’ circumstances can change, and there may be a time that comes when you need some extra support that you hadn’t anticipated.
The Mortgage Charter is beneficial as it clearly sets out the support measures on offer to homeowners who are having difficulty repaying their mortgage, and most of the mortgage lenders in the UK have signed up for it. This means borrowers have consistent support if needed, which can provide some much-needed reassurance at a time when rates are at an all-time high.
What support does the Mortgage Charter offer?
There are three different options which homeowners can explore when it comes to looking for support from the Mortgage Charter, which include:
Switching to a temporary interest-only mortgage
Borrowers can choose to switch to an interest-only mortgage for 6 months, which means you’re only required to pay off the interest on your mortgage, rather than the capital i.e the amount you’ve borrowed to afford your home. With this option, your monthly repayments will be largely reduced in the short term, however, don’t forget that when you do switch back to the previous terms, you’ll have to repay more to make up for the missed capital repayments.
Extending your mortgage term
A second option to reduce monthly repayments is to extend your mortgage term. Some people may have a 25-year mortgage which could be extended to 30 years, meaning they can spread out the repayments over an additional 5 years, therefore reducing costs. However, remember that this would mean you’ll pay more interest on the loan overall.
Lenders each have different repayment terms, so if you go for this option and the time comes when you’re able to switch back to your original term, you may need to pass another affordability check, so it’s important to check the terms first.
Additionally, the Mortgage Charter also offers protection for all homeowners from repossession for 12 months after a first missed payment, unless in exceptional circumstances.
The option to lock in a new fixed-rate up to 6 months before your fixed-rate deal ends
Homeowners coming to the end of their fixed-rate deal now have the option to lock in a new deal up to 6 months before it ends. Additionally, you can request a better like-for-like deal if with your mortgage lender, if one is available, up to 2 weeks before your new term begins.
Each of these options is available to all homeowners with a residential mortgage, as long as your lender is signed up to the Charter, you aren’t already on an interest-only mortgage, you’re not behind on your repayments, and you don’t have a second charge mortgage. None of the options offered by the Charter will negatively impact your credit score.
If you are considering one of these options, you can use an online mortgage calculator to see how your repayments could be altered.
Last but not least, another lender commitment provided by the Charter is to provide individual support to any homeowners who are struggling with their repayments.
This means coming up with tailored support and ensuring customers are well-informed about all the options available to them. If you are currently having problems with your repayments, or you’re anxious about your fixed-rate ending, make sure to have a chat with your lender so they can offer guidance and hopefully offer a solution to suit both of you.
We hope this blog post has given you some helpful information, and if you’d like any further information about moving house, get in touch for a friendly no-obligation chat.
