Mortgages: Banks are promising new support with higher mortgage rates

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By Kevin Beachy and Gemma Dempsey, BBC News 23 June 2023

Updated 17 minutes ago

Image source, Getty Images

Banks and construction organizations will provide more flexibility to mortgage holders who are struggling with rising interest rates.

The move comes after the bank chiefs met the chancellor, Jeremy Hunt, in Downing Street on Friday.

Borrowers will be able to make a temporary change to the terms of their mortgage and then be able to return to their original deal within six months.

This will allow some to get lower payments for a short period, once the interest on the home loan is paid.

Hunt said the six-month flexibility to switch terms won’t affect credit scores as it might have previously.

However, it will still be the case that not making payments or taking a full installment of payments, known as a holiday mortgage, will still hurt a person’s ability to borrow in the future.

The lenders also agreed to a 12-month delay before taking recovery action against borrowers who are unable or unwilling to pay in the long term.

The bank’s chief executives described it as a “productive” meeting as they left Downing Street.

Labor said the typical British family was making £1,000 more in mortgage payments than its neighbors in Germany, France, the Netherlands and Ireland.

The meeting between the lenders and Mr Hunt follows the Bank of England’s surprise decision on Thursday to raise interest rates to 5%, up from 4.5%, as it tries to tackle inflation.

As a result, millions of households in the UK will see their budgets squeezed.

The post-meeting announcement will never lead to direct government intervention to help those struggling, but it will launch a campaign to make them aware of their choices.

The idea is that it encourages people to talk to their lender if they are in trouble, without feeling there are financial barriers to doing so.

“These measures should provide relief to those worried about rising interest rates and support those in difficulty,” said Mr Hunt.

After Thursday’s interest rate hike, some, including the National Residential Landlords Association (NRLA), called for government action, such as reintroducing mortgage interest relief and removing the freeze.

The NRLA warned that interest rates of 5% could force landlords to sell 735,000 properties for rent which it said would “exacerbate the ongoing supply and demand crisis across the private rented sector”.

But Hunt and Prime Minister Rishi Sunak have dismissed suggestions the government should get involved, saying providing support to borrowers could undermine the Bank of England’s fight against inflation. Figures released on Wednesday showed it stuck at 8.7% in May.

After announcing the rate hike, Sunak said the government would remain “steadfast and stick to its plan” to bring down inflation.

Interest rate increases are partly intended to discourage spending in the economy, by reducing people’s disposable income. Therefore, analysts indicated that providing general support to mortgage holders would work against the policy of the Bank of England.

Bank of England Governor Andrew Bailey admitted on Thursday that the 13th consecutive rise in interest rates since December 2021 will cause “difficulty and pain” for many. He said those with loans would be “understandably concerned”.

Mortgage rates have been rising for months. The average two-year fixed rate mortgage is currently 6.19%, while the five-year rate is 5.82%, according to financial data firm Moneyfacts.

The average two-year mortgage rate rose to 5.66% from 5.49% after Thursday’s interest rate hike.

In June last year those rates were closer to 3%.

According to David Hollingworth of London and Country Brokers, the Bank of England’s latest move has yet to seep into current mortgage rates.

He said, “The fixed prices have not gone into an excessive trend, they are still moving quickly but there is no acceleration. We will see how the markets react in the coming days.”

Higher interest rates can also reduce spending in the economy by enhancing the incentive to save money.

The BBC understands that some savings rates have already been brought in after Thursday’s rate hike. But in recent weeks, MPs have criticized banks for failing to pass interest rate increases in full to savers with easily accessible accounts.

Harriet Baldwin, chair of the Treasury Committee, told the Today program that High Street banks have been “incredibly slow” in passing interest rate increases.

Banks have “taken for granted that we used to not earn anything from savings,” she said, adding that savers are “essentially being taken advantage of at the moment.”

What do I do if I can’t pay my debts?

It is important to talk about financial difficulties before you find yourself in a spiral of debt. The earlier, the better.

If you think you can’t pay your debt or find dealing with it stressful, seek support immediately. You are not alone and there is help available.

A trained debt counselor can talk you through the options available.

How will the latest interest rate increase affect you? You can share your experiences by emailing [email protected].

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