Homeowners struggling to pay their mortgage bills will be able to switch to interest-only deals without a formal repayment plan under new plans to help borrowers through the cost of living crisis.
Customers will be able to ditch repayment loans for a temporary period under drafts plans laid out by City watchdog, the Financial Conduct Authority. It announced the plans on Wednesday after attending a roundtable with lenders and the Government to discuss ways to help mortgage borrowers as fears of arrears mount.
The FCA guidance said the plans would help lenders prepare for “providing mortgage forbearance at scale”.
Interest-only deals were once prevalent but became heavily regulated after millions of borrowers were sold deals before the financial crisis with no plan on how to repay the capital.
However, some 1.8 million homeowners will come to the end of fixed-rate deals in 2023, according to banking trade body UK Finance, and will have to refinance at far higher rates – in some cases quadruple their previous deals. This will come as they shoulder the largest drop in real household disposable incomes on record.
The planned FCA guidance advises lenders to let homeowners who are at risk of payment shortfalls switch to an interest-only loan without an agreed repayment strategy. This means that a form of forbearance previously only available to those with significant funds will be unlocked for all borrowers. Homeowners would have to make up their repayments after the temporary period is over, however.
For a permanent switch to an interest-only basis, a credible repayment plan would still be required, the FCA said.
Under its proposals, customers will also be able to extend the terms of their mortgage payments without an affordability assessment, provided the extension will not extend past retirement age.
Customers switching from an expiring fixed-rate mortgage can switch to a new rate with their lender without undertaking an affordability assessment, the FCA added.
The simplification of this process will help 97pc of borrowers, the Government said, but will only happen in cases where there are no other changes to the terms of their contract.
After the meeting between the Government and banks, the Chancellor Jeremy Hunt said it was his number one priority to tame inflation for the British public.
He added: “UK lenders have a part to play in that. We expect every lender to live up to their responsibilities and support any mortgage borrowers who are finding it tough right now.”
The FCA is now consulting on the guidance over the next 10 days. Sheldon Mills, of the FCA, said: “If you’re struggling to pay your mortgage, or are worried that you might, you don’t need to struggle alone. Your lender has a range of tools available to help, so you should contact them as soon as possible.”
David Hollingworth, of L&C mortgage brokers, added: "Clearly borrowers will need to understand the implications of these variations, which could lead to more interest being paid. But if it helps households ride the higher costs affecting them in the near term, it has to be a positive step."