Mounting mortgage pressures will not tip Britain into the tidal waves of repossessions witnessed in recent financial crises, the head of the City watchdog insisted after an emergency meeting with the chancellor and bankers at No 10.
Nikhil Rathi, the chief executive of the Financial Conduct Authority (FCA), said that while households were increasingly worried about how to cope with higher debt payments, lenders would not act hastily.
Struggling mortgage holders will be given a 12-month grace period before repossession proceedings begin, as part of the measures agreed with banks and building societies.
“We can assure people that there will be no repeat of the kinds of experiences we had in the 1990s or in 2008,” Rathi said.
“This is a really challenging and anxious time for mortgage holders right across the country. It’s incredibly important for mortgage holders to feel able to speak to their lender early and openly about any concerns they may have,” he added.
Bosses from Britain’s biggest lenders including NatWest, Lloyds and Nationwide were called in by the chancellor, Jeremy Hunt, on Friday to help mitigate a “mortgage timebomb” after the Bank of England raised its key interest rate to 5% on Thursday in an effort to cool stubbornly high inflation.
It marks the highest level for interest rates since the 2008 financial crisis and the central bank’s 13th consecutive rise, shattering the decade-long age of ultra-low rates.
More than 2.4m fixed-rate homeowner mortgage deals will expire by the end of 2024, according to industry data, forcing borrowers into sharply higher monthly outgoings. It will trigger an average increase in home loan repayments of £2,900 for each household remortgaging next year, according to figures from the Resolution Foundation thinktank.
The UK’s relatively short-term mortgage market has had one of the bigger increases in effective interest rates
The agreement to ease the impact on mortgage holders facing higher monthly repayments builds on guidance imposed during the Covid-19 pandemic and extended as inflation has soared in its wake. It is similar to guidance issued to lenders in March 2023 by the FCA.
The agreement on Friday means these rules were “now being made permanent”, Rathi said.
The FCA now requires mortgage and credit providers to support consumers struggling to make repayments, allowing them to reduce their monthly repayments by extending their mortgage term or switching to interest-only repayments. Homes will not be repossessed until 12 months after a borrower misses a mortgage payment.
Crucially, if a borrower switches back to their original payment terms within six months, they can do so without affecting their credit score or needing a new affordability check, the Treasury said in a statement.
Consumers will now “be able to switch back and do that without that impacting their credit score”, Rathi said.
He added the vast majority of mortgage holders are able to make their repayments at present, but surveys from the City watchdog have revealed mounting concern among borrowers.
“It is challenging because families are having to make decisions about their lifestyle, about holidays, about other leisure activities so that they can keep making their mortgage repayments,” he said.
“But as it stands right now, the repossession levels remain below where they were before the pandemic, and we’re going to be very, very vigilant around this to make sure that there’s no repeat of the more severe experiences we had in the 1990s and 2008.
“A lender should always consider repossession only as a last resort, after all other options have been tried and after a full and detailed process.”
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Most modern mortgages require buyers to pay a greater proportion of the property value up front. This means they are also less likely to find themselves in negative equity – where their loan is greater than the value of their home.
However, the number of people “who are financially stretched” is “very sensitive to where interest rates are”, he said.
Financial markets now predict the Bank rate will hit 6% by the end of the year, only starting to fall next summer. On Friday, the average two-year fixed residential mortgage rate stood at 6.19%, while the average five-year fixed rate edged up to 5.83% on Thursday, according to Moneyfacts.
The FCA is also concerned about consumers who may be struggling with unsecured lending.
“Please don’t try to manage this alone,” Rathi said, suggesting that people contact Citizens Advice or other debt charities.
The watchdog has intervened twice in recent months to try to protect vulnerable borrowers. It secured £47m of compensation for customers of credit providers in May after it found they had failed to spot customers with debt problems or guide them to advice on debt management.
The FCA also banned firms from charging referral fees to customers in debt difficulties that led to them being charged thousands of pounds when they could have been debt free within a year for as little as £90 through a voluntary agreement.
Mortgage crisis: UK lenders agree to 12-month grace period on repossessionsRead more
The regulator said banks’ savings rates, which MPs and campaigners have criticised for failing to keep pace with rates on borrowing, were also under scrutiny. They will also be the subject of new rules from 31 July, called a “consumer duty”.
“We are concerned about the savings rates,” said Rathi. “We are looking at it closely and engaging with the major firms about this to understand how they’re making these decisions in terms of the pace with which they are changing their rates, the rationale for doing so and the potential differential treatment between new customers and existing customers.”
However, the measures failed to address the impact of rising rates and inflation on renters, after official figures showed private rental costs rose at an annual rate of 5% in April – the sharpest pace on records dating back to January 2016.
