More than 2m homeowners facing a mortgage cliff edge are to be offered breathing space to find an affordable fixed-rate deal under a banking deal brokered by Jeremy Hunt.
Borrowers whose low-cost fixes are coming to an end will be given a six-month window to secure the best new rate before their existing deal expires under the industry-wide agreement.
The proposals are intended to help households avoid being caught out by market turmoil and relentless interest rate rises that can cause wild swings in the mortgage deals available on a weekly basis.
They came as traders bet that rates would hit 6.25pc next year, the highest level since 1998.
After meeting with major banks in Downing Street on Friday, Mr Hunt said: “These measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty.
“Tackling high inflation is the Prime Minister and my number one priority. We are absolutely committed to supporting the Bank of England to do what it takes. We know the pressure that families are feeling.”
A total of 2.4m households are facing a severe financial hit when their current fixed rate deals expire this year and next.
The average mortgage borrower will suffer a jump in payments of £280 per month, according to the Institute for Fiscal Studies, after typical two-year rates soared from 2.5pc two years ago and 3.25pc last year to more than 6pc this week.
The Bank of England this week increased its base rate from 4.5pc to 5pc.
Policymakers are attempting to get inflation down from its May rate of 8.7pc, more than four times the 2pc target.
Mr Hunt said: “There are two groups of people that we are particularly worried about. The first are people who are at real risk of losing their homes because they fall behind in their mortgage payments.
“And the second are people who are having to change their mortgage because their fixed rate comes to an end, and they’re worried about the impact on their family finances of higher mortgage rates.”
Under the new rules, customers can lock in a fresh deal with their bank or building society up to six months before their existing fixed rate ends. They can then change this to a cheaper rate if one appears at any point in the intervening period.
Some banks already allow this sort of flexibility, but not all do.
The pact, agreed with the bosses of banks including NatWest, HSBC, Barclays, Santander and the Nationwide Building Society, also protects customers who are in dire financial straits and at risk of losing their homes.
It gives anyone facing repossession a 12-month grace period to get their finances in order before the bank is legally able to take their house, guaranteeing more time in an already lengthy legal process.
Borrowers who are in trouble can also switch to interest-only payments or extend their mortgage term to temporarily reduce payments. They will then be able to revert to their original mortgage terms within six months without penalty.
Mr Hunt said: “Absolutely anyone can talk to their bank or their mortgage lender and it will have no impact whatsoever on their credit score. That’s really important. A lot of people worry about that.
“If you are anxious about the impact on your family finances and you change your mortgage to interest-only or you extend the term of your mortgage and you want to go back to your original mortgage deal, within six months, you can do so, no questions asked. No impact on your credit score.”
The changes mean that households can cut their monthly payments at a time of acute strain, with few long-term consequences for their finances – though reducing monthly payments will likely mean they ultimately pay more interest over the course of their mortgage as a whole, as they will be in debt for a longer period of time.
This is a change from a previous agreement reached with banks in December, which warned that measures to reduce payments might affect borrowers’ credit ratings.
Reena Sewraz at consumer group Which? welcomed the moves.
She said: “It’s positive to see banks agreeing to delay repossessions without consent by at least 12 months and allowing mortgage holders to make temporary changes to the terms of their deal, which could help to create some breathing space for those worried about their situation.
“However, switching to interest-only payments or extending the term of a mortgage won’t be right for everybody so it’s still important to take time to speak to your lender, understand your options and help find what is right for you.”
Repossessions have been creeping up from pandemic-era lows, when households were given a reprieve as part of the package of measures helping with financial strains in the Covid lockdowns.
A total of 750 homes were repossessed by lenders to owner-occupiers in the first quarter of this year, according to industry group UK Finance, up from a low of 140 in the final three months of 2020.
However this is still well below the pre-pandemic levels. In the fourth quarter of 2019, before Covid struck, 1,340 were repossessed.
In the financial crisis, almost 49,000 homes were repossessed in 2009, according to industry data, while in 1991 the annual figure hit 75,500.
