Mortgage 12-month grace period: what’s in it for you? | Mortgages

Struggling homeowners are to be given a 12-month grace period before their home is repossessed as part of a new “mortgage charter” struck between Jeremy Hunt and Britain’s biggest lenders after this week’s shock interest rate rise.

What is the detail?

The pledge on repossessions is one of the main forbearance measures in the agreement struck with lenders – including big high street names NatWest, Lloyds, Santander and Barclays – who together control more than 75% of the mortgage market.

The main points are:

• No home will be repossessed within 12 months of the first missed payment.

• Customers can seek advice from their lender without it affecting their credit score.

• Customers can switch to an interest-only deal for six months; or extend their mortgage term and revert back within six months if they want. Neither option requires an affordability check or will affect their credit score.

The action on repossessions is eye-catching but how many people will it actually help?

It is too early to say at this stage. While consumer champion Martin Lewis stated this week that the mortgage “ticking timebomb” had “exploded” it is actually more of a slow motion car crash-type of crisis.

The majority of homeowners – 6.9 million, or 81% – have a fixed-rate deal and many of them are still insulated from the recent rate rises shock as their loan deal might not end for months or even years.

Nonetheless, the moment of reckoning is coming, with 1.4 million households due to roll off their fixes in 2023. The step up in payments will be huge for this group as many are used to payments based on an interest rate of less than 2%.

The situation is most acute for the 1.4 million Britons who have a tracker, with a rate that moves in lockstep with the base rate, or whose deal has ended and they have moved on to their lender’s more expensive default standard variable rate.

Are people already losing their homes?

The good news is that so far the number of homes being repossessed is very low. The bad news is that they are rising. In the first three months of this year, 750 homes were repossessed – up 50% on the previous quarter, according to banking group UK Finance. The figure is about 1,250 if you include buy-to-lets. For context, between 1991 and 1993 about 188,600 people lost their homes.

The same data shows the number of people falling behind with their mortgage payments edged up slightly to 76,630 (defined as being in arrears of 2.5% or more of the outstanding balance) in the first three months of 2023.

Richard Lane, director of external affairs at StepChange, says that so far the debt charity is not experiencing an increase in homeowners coming to it for advice about their mortgage arrears.

“This doesn’t mean that households aren’t struggling to cover other bills, or may be relying on credit to make ends meet, as their top priority will always be to meet their mortgage payments,” he said. “Our recent research found that 45% of mortgage holders, equivalent to almost 7 million people, have found it difficult to pay bills and credit commitments in the last few months.

“While generally homeowners tend to have higher levels of financial resilience, the impact of rate rises will quickly prove unsustainable for many, especially when considering the wider cost of living pressures.”

Has the government intervened to stop repossessions happening during a crisis before and did it work?

Yes it has – and it did. When the UK was plunged into crisis by the coronavirus pandemic in March 2020 the FCA told banks and building societies they must not repossess people’s homes. The ban would remain in place for a year as the country went in and out of lockdown, and as a result no one lost their home.

Experts said this new agreement appeared to mirror that diktat but were waiting to see the full guidance. Nevertheless, Hunt was clear: “The last thing that they [banks and mortgage lenders] want to do to 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.”

If you have not yet missed a payment, that promise should give you some reassurance. In the meantime if you are struggling, seek debt advice from somewhere like Citizens Advice or StepChange. And do not be afraid to speak to your lender. The charter sets out in black and white that doing so will not have an impact upon your credit score.