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UK banks have agreed to wait at least 12 months before repossessing the homes of borrowers who fall behind on payments during a looming mortgage crisis fuelled by a surge in interest rates.
Chancellor Jeremy Hunt announced the deal along with a commitment that borrowers could temporarily lengthen the term of mortgages without affecting their credit ratings.
The talks in Downing Street on Friday came as traders raised their expectation of peak interest rates to 6.25 per cent, the highest level since 1998, while some analysts forecast a steeper fall in house prices.
The Bank of England’s Monetary Policy Committee voted on Thursday to increase rates by 0.5 percentage points to 5 per cent — the highest level for 15 years — leading to big jumps in monthly mortgage repayments for borrowers on variable rates or needing to refresh fixed-rate deals.
Stubbornly high inflation and the BoE’s unexpectedly aggressive response have stoked bets on further tightening.
UK house prices are now forecast to drop by 10 per cent, according to Pantheon Economics, which had previously anticipated a peak-to-trough decline of 8 per cent. Pointing to “the outlook for mortgage rates”, it said on Friday: “We expect the downturn to be drawn out, with prices not reaching a floor until the beginning of 2024.”
Repossessions are still at a relatively low historic level, but many experts are worried about the consequences of the recent rise in borrowing costs.
“The last thing that they want to do is repossess a home, but in that extreme situation they have agreed there will be a minimum 12-month period before there’s a repossession without consent,” Hunt said after meeting bank executives in Downing Street.
The policy goes further than Labour’s call this week for a six-month wait before repossession could occur. Under the government’s existing “pre-action protocol” banks should not repossess a property unless “all other reasonable attempts” to resolve the situation have failed.
One lender pointed out that the existing process was quite drawn out and there were few cases of people going into arrears or missing payments who get to the point of repossession within 12 months.
The chancellor said he had also agreed with lenders that customers could discuss options for adjusting their mortgage without affecting their credit score, in line with existing guidance from the Financial Conduct Authority, the UK watchdog.
Hunt said lenders also agreed that if borrowers changed their mortgage to an interest-only contract, or extend the term of the deal, they could return to their original mortgage deal within six months without affecting their credit score.
“That I think is going to give people a lot of comfort and stop people worrying about having conversations with their banks when they are worried about their financial situation,” he said.
Many banks already offer struggling customers options, including temporarily switching to an interest-only mortgage deal, but Friday’s commitment by lenders standardises it across the industry.
Other measures, such as customers talking to their banks without it affecting their credit score, are already available but will be better publicised, one lender said.
Attendees at the meeting included Nikhil Rathi, head of the Financial Conduct Authority, as well as chief executives Charlie Nunn of Lloyds, Debbie Crosbie of Nationwide, Alison Rose of NatWest, David Duffy of Virgin Money and Mike Regnier of Santander UK.
Rathi said: “We’ll move quickly to make any changes needed to support today’s commitments.”
The chancellor has ruled out a return of the mortgage interest relief scheme known as MIRAS. He has also rejected the idea of giving fiscal support to households, arguing the government’s priority is to “strangle” inflation.
The Liberal Democrats have called for a new multibillion-pound support scheme for vulnerable householders. But instead, the chancellor has encouraged lenders to show forbearance to struggling customers.
Under a December 2022 agreement between banks, regulators and the Treasury, lenders are required to offer tailored support to those unable to keep up their mortgage payments.
Additional reporting by Siddharth Venkataramakrishnan
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