The Mortgage Charter isn’t cash help; it’s a warning blaring out to distressed mortgagees. Get out with equity, while you still can.
Last week, I put forth the argument that Chancellor Jeremy Hunt with all the apparatus of state would not intervene in the coming mortgage crisis. This new ‘mortgage charter’ — which virtually every lender has signed up to — does not constitute support. Arguably, there’s a not a single relevant thing in it that is not already on offer to struggling borrowers.
But from Hunt to Lewis to Sunak, to UK Finance CEO David Postings and FCA CEO Nikhil Rathi — all have come up with flowery language to let mortgagees know that this piece of legislation is a positive step forward.
Indeed, our wonderful PM has ventured his sage advice: to ‘hold your nerve’ in the face of increasing interest rates. As though millions are overleveraged traders who went short on gold in 2021 and are about to be margin called, and not the worried parents of two stressing about being made homeless in a country where social housing has been expunged.
To be fair, you can’t expect much more from an ex-Goldman banker.
But let’s dive into this much-vaunted development.
Mortgage Charter in brief
One thing that you can say for the charter is that it brings additional regulatory clarity. It’s worth noting that the base rate now stands at 5%, with CPI inflation at 8.7%. The markets consider that the base rate will rise to 6.25% at some point next year; though analysts have consistently underestimated the stickiness of UK inflation and I think this crucial figure will go far further.
While no lender wants to repossess a mortgagee’s home — it’s both expensive and bad optics — lenders will go for this last resort where there is no alternative. In recent years, repossessions have been extremely light; even after a sizeable increase, there were just 3,160 mortgage repossessions in Q4 2022.
Compared to the circa 11 million outstanding mortgages, this barely constitutes chicken feed. But the reality is that as mortgagees come off their fixed rate, many are facing bills hundreds or even thousands of pounds higher than they have been paying, in some cases for over a decade.
So, what’s in this new charter? I won’t include every detail, but the basics are:
- mortgagees can contact their lender for help without an impact on their credit file.
- mortgagees can switch to a new mortgage deal at the end of their fixed rate without another affordability check.
- lenders will offer mortgagees the chance to extend their term, switch to interest only or enjoy a payment deferral in some cases.
- buy-to-let is excluded from protections.
Further to this:
- mortgagees will not be ‘forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.’
- mortgagees can switch to interest only for six months or extend their mortgage as long as they are up to date with payments.
The Prudential Regulation Authority has already confirmed that these requirements will not lead to an increase in capital requirements for banks. In other words, these are just words and not particularly useful to mortgagees in terms of actual financial aid.
However, the idea seems to be to prop up the Ponzi scheme and kick the can down the road. Mortgagees being allowed to start a new deal without an affordability check is sub-prime lending 2.0. Being given a year’s grace is already standard practice.
Mortgage support: the long-term problem
Most mortgagees can already switch to interest only when in a tight spot, or ‘extend and pretend’ for longer issues. This extending of mortgage terms had already been happening in practice — with buyers stretching 25 year mortgages commonly to 35 year terms.
Now 40 year terms are starting to feature more often, and I can’t quite see how a forty-year old with 20 years of their mortgage left extending their mortgage by decades to lower the monthly payment but pay tens of thousands more overall, can be good for the individual or the economy.
Indeed, the entire purpose of increasing the base rate is to take the heat out of the economy. With the government now acting to reduce the effect of rising mortgage rates by allowing mortgagees to extend their term, the Bank of England will see inflation become further entrenched, making higher rates inevitable.
And if the government goes further, inflation will get stickier, and rates will rise higher. The end result could well be that a mortgagee remortgaging on an extended term finds that when they leave their fixed rate, the new monthly payment is higher than what they had previously escaped from. This policy helps nobody for very long.
It’s the same with student loans — new students are now repaying for 40 years, up from 30 years previously, and just 25 years before that. The key knock-on effect will be on private pensions, a factor most governments don’t care about because it’s not a near-term problem.
Consider this: a generation ago, your mortgage and student loan repayments both lasted for 25 years. It was perfectly normal to be free of both by your early 50s, just as you hit peak earning potential — and your excess income went into your SIPP.
Now a graduate with a mortgage will be paying both back until retirement. The state pension is already unsustainable. The outcome is a timebomb being built up for a future generation of taxpayers.
Of course, the six month time limit for interest only is interesting — while this is no different to the current standard, it’s actually the government saying to mortgagees: ‘If you can’t afford your mortgage, sell now and walk away with some equity.’
For the vast majority of people, this will be substantially more than their mortgage, but only if they sell now. As the crash gathers pace, those who wait after having been cosseted by government intrusion into personal finances in the past, will be the ones who suffer most.
After £895 billion of quantitative easing, over a decade of low rates, funding for lending, toxic Help to Buy loans, Stamp Duty holidays, and mortgage guarantees, the chickens are coming home to roost.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.