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New Mortgage Letter Rules Go In for Distressed Borrowers: How They Affect You


A package of government measures to help struggling homeowners facing rising mortgage rates went into effect today.

Lenders including NatWest, Nationwide, Barclays will now allow home loan customers to switch to interest-only payments or extend the term of their loan for up to six months without affecting their credit score.

For example, someone with a 20-year mortgage term can temporarily switch to a 40-year term, lowering their monthly payments.

Chancellor Jeremy Hunt said “no questions would be asked” of borrowers looking to make the move as they face the impact of high mortgage rates.

Chancellor Jeremy Hunt announced measures after meeting with mortgage lenders this morning

But borrowers should be aware that changing their mortgage to different terms could cost them tens of thousands of pounds more in the long run.

Interest-only mortgages are cheaper since they involve only making monthly interest payments, but not paying down any of the debt.

Switching to an interest-only mortgage, even for a short period, will leave the borrower with less time to pay off the mortgage balance once they switch back.

As a result, when they switch back to a payment loan, they will eventually have to pay more each month to make up for lost time.

The alternative is that they will finish the term of their mortgage with outstanding debt.

Similarly, extending the term of a mortgage (the length of the loan) may lower your monthly payments, but it will mean that the debt will earn more interest over time.

Paying a £200,000 5 per cent mortgage over 35 years instead of 25 years will mean incurring total interest of £224,000 instead of £151,000.

> Mortgage Calculator: Compare the cost of interest only and the payment

The Mortgage Charter, filed last month, also protects homeowners from foreclosure for 12 months beginning June 26.

This means that lenders will have to give customers at risk of foreclosure a 12-month grace period, from the time of the first late payment.

However, there are several loopholes in the scheme.

The new rules only apply to 75 percent of mortgage lenders, and homeowners with buy-to-let mortgages are excluded.

Lenders that have signed the deal also include HSBC, Santander, Lloyds Banking Group (including Halifax, Bank of Scotland and Lloyds Bank) and Virgin Money.

This respite will come as a relief to homeowners concerned that their properties will be foreclosed upon if they fall behind on their mortgage payments.

During the worst of the Covid-19 pandemic, lenders were prevented from repossessing homes until after the crisis.

Rates have risen sharply in recent weeks, putting more borrowers at risk of a mortgage shock.

Rates have risen sharply in recent weeks, putting more borrowers at risk of a mortgage shock.

Why was the Mortgage Charter launched?

The Mortgage Letter package came after the Chancellor met with lenders to find ways to help homeowners with the rising cost of their mortgage loans.

Options available to borrowers, such as switching to interest-only or extending terms, already exist in many cases, but doing so can damage your credit history.

The new rules protect people from damaging their finances for up to six years and should keep arrears low as bills mount.

Hunt said: ‘There are two groups of people we are particularly concerned about.

‘The first is people who are at real risk of losing their homes because they fall behind on their mortgage payments.

“The second is people who have to change their mortgage because their fixed rate is coming to an end, and they’re worried about the impact on their family finances of higher mortgage rates.”

Also included in the statute is the right for homeowners struggling with payments to talk to their lender about their options without being judged and those who hit the bottom of a fixed rate can “lock in” a new deal for up to six months. of anticipation. .

All of these options can be done without hurting a borrower’s credit score, Hunt said.

While welcome, these last two measures were widely available to customers before the letter was introduced.

When the letter was first announced, Hunt doubled down on his earlier position that the government will not give any bailouts to distressed homeowners.

The average two-year fixed mortgage rate for borrowers is now 6.63 percent, according to MoneyFacts. The five-year average is 6.13 percent.

> Why are mortgage rates rising so fast?

What to do if you need a mortgage

Borrowers who need to find a mortgage because their current fixed rate agreement is coming to an end, or because they have agreed to purchase a home, should explore their options as soon as possible.

This is Money’s best mortgage rate calculator, powered by L&C, it can show you offers that match your mortgage and property value

What if I need to re-mortgage?

Borrowers should shop around and talk to a mortgage broker and be prepared to act to secure a rate.

Anyone with a fixed rate agreement that ends within the next six to nine months should consider how much it would cost to remortgage now and consider closing a new agreement.

Most mortgage deals allow fees to be added to the loan and are then only charged when you withdraw. By doing this, borrowers can lock in a rate without paying expensive setup fees.

What if I am buying a house?

Those with agreed home purchases should also aim to lock in rates as soon as possible, so they know exactly what their monthly payments will be.

Homebuyers should be careful not to stretch themselves too far and be prepared for the possibility of house prices falling from their current high levels, due to higher mortgage rates limiting people’s borrowing capacity.

How to Compare Mortgage Costs

The best way to compare mortgage costs and find the deal that’s right for you is to talk to a good broker.

You can use our best mortgage rate calculator to display offers that match your home value, mortgage size, term, and fixed rate needs.

Keep in mind, however, that rates can change quickly, so the advice is if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you. .

> Consult the best fixed-rate mortgages that you could apply for

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Merry C. Vega is a highly respected and accomplished news author. She began her career as a journalist, covering local news for a small-town newspaper. She quickly gained a reputation for her thorough reporting and ability to uncover the truth.

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