On 7 December 2022, the FCA issued a consultation on Guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living.
FCA consultations are normally lengthy, but here the FCA said:
To ensure we can act quickly to enable firms to help consumers, we are consulting on this guidance over the next 10 working days.
This is the sort of short deadline the FCA used for its emergency Covid measures in 2020. I think this is justified given the difficulties ahead in 2023.
Not an external “cost of living” problem
Many mortgage holders have been badly affected by inflation this year. Bills look set to carry on rising next year, with the energy price cap going up another 20% in April. And the government’s cost of living help is being cut back.
These price rises are out of the control of mortgage lenders – all they can do is see where they can offer help to people who are badly affected. And it may not be obvious to a lender which borrowers are in difficulty unless they come forward.
But next year, a large part of the crisis facing many with mortgages will be the rising cost of the mortgages themselves. The Bank of England’s December Financial Stability report says:
- payments on around 4 million owner-occupied mortgages are expected to increase in 2023;
- 2.7 million are expected to see a rise of over £100 a month.
Here the lenders can predict in advance the exact date when customers may start to have problems. And the rates offered to the customer by the lender can determine the extent of those problems.
So unlike Covid, the lenders are not reacting to purely external events.
Waiting until a borrower gets into arrears or contacts the lender is missing a major opportunity to have discussions with the customer that could potentially avoid arrears. Lenders should be proactively contacting all customers 6 months before a fix ends, to explain that help will be available if the mortgage increase or other cost of living problems will cause problems. The guidance should say this.
Use standard plain English
It is essential that borrowers are given a simple explanation in plain English about what their lender can do. It would help if these messages are standardised across lenders so that simple publicity could be given through newspapers – the FCA could help by proposing wording lenders could use that could then be included in letters and on their website.
For example, switching to a new fix without reassessing affordability. Many borrowers are very worried that if they ask for payment arrangements on unsecured debts, this will harm their ability to get a new mortgage fix. If their lender will give a new fix with no affordability assessments. this it needs to be made very clear in a positive message – no hedging with a long list of possible help.
Borrowers who need forbearance also need new fixes
The Guidance is divided into customers requiring forbearance and those not requiring forbearance. It isn’t made clear that a customer who needs forbearance may also need access to a new fix at a lower rate of interest.
Many firms offer borrowers who are up to date with payments the ability to switch their interest rate.
I don’t think it is treating a customer fairly to only offer switches to people without arrears. There seems to be no justification for charging someone who already has arrears a higher rate.
Temporary interest-only switches
If inflation has peaked and base rates peak next year, then a temporary switch to an interest-only mortgage, with a possible extension at the end to 2 years, may be a sensible option for many borrowers in difficulty.
I think it would help if the messaging around this said clearly “for 1 year with a possible extension to 2 years“. Clarity and specificity will encourage borrowers to come forward early, before there are arrears, and talk about their options. It think the importance of this outweighs the possibility that a few borrowers may only need a few months of interest only.
Other credit from the same lender
This guidance only covers mortgages. But I think it should state clearly that a lender must consider everything it knows about a customer and offer forbearance on other credit as well. No bank should be charging interest on an overdraft or credit card if a customer has problems with their mortgage.
Are you worried now about your mortgage?
This article has been looking at how things may change next year and how mortgage lenders should tell customers about this.
Most of this help is already available if you ask for it.
So if you have problems now with your mortgage, or you expect to next year, don’t wait to talk to your lender. If you are worried about your options, talk to a good debt adviser first – see my list here: Good places for Debt Advice.
If you feel your mortgage lender hasn’t treated your fairly, you may be able to win a complaint at the Financial Ombudsman. See Financial difficulties with mortgages for an overview by the ombudsman, including some case studies.