Laura Suter, head of personal finance at AJ Bell, comments on the ‘mortgage charter’ announced today by the Chancellor following meetings with the FCA and lenders:
“The government is balancing on a wafer-thin tightrope – if it offers too much help to homeowners that could undermine attempts to tame inflation through increased borrowing costs, but if it does nothing it looks heartless as some people face losing their homes. With the backdrop of a looming general election the government is under huge pressure to fix the economy without alienating voters.
“This deal with mortgage companies strikes a middle ground – it offers some support to those homeowners hardest hit, but not so much that it should boost inflation. For those who are struggling to pay their bills it means that a temporary switch to interest-only payments, or extending the term of the mortgage, can easily be reversed if their finances improve.
“Something like extending the term of your mortgage can have a big impact on monthly payments and can go a long way to mitigating the impact of rising interest rates. But, before households leap to take advantage of the new flexibility they need to really consider the long-term impact of such moves. For example, someone who borrowed £200,000 would pay almost £39,000 more in interest if they opted for a 35-year loan rather than a 25-year term, assuming a 3% interest rate for the duration of the loan. Clearly the more you borrow and the higher the interest rate the more the cost of extending the term is amplified, so at £400,000 of borrowing that 10-year extension from 25 year to 35 years costs an extra £77,500.
“But the biggest thing that can be done is to ensure mortgage customers who get into trouble with payments are treated equally and fairly, regardless of who their mortgage lender is. We saw during the pandemic that sub-standard support from financial firms was rife, with the FCA subsequently fining firms for failing to help customers – so the regulator needs to be hot on similar failures today.”
