Mortgage Charter

Wednesday 28th June 2023 Lords Chamber

Statement

The following Statement was made in the House of Commons on Monday 26 June.

“Mr Speaker, last week the Bank of England increased interest rates to 5% as the UK, like other countries, grapples with high inflation. We are steadfast in our support for the independent Monetary Policy Committee as it takes whatever action is necessary to return inflation to the 2% target in the medium term.

None the less, I know that higher inflation and interest rates cause anxiety and concern for many families. That is why the Government are already supporting families with one of the largest support packages in Europe, worth £94 billion, or £3,300 per household on average. As interest rates rise, I will not take action that undermines the Bank of England’s monetary objectives, but where we can take non-inflationary measures to relieve the anxiety faced by families, we will do so. That is why on Friday, I met the UK’s principal mortgage lenders, alongside senior representatives from the Financial Conduct Authority and UK Finance, to agree new support for people struggling with their mortgage payments. At that meeting, I secured agreement from lenders to a new mortgage charter that sets out what support customers will receive, which we are publishing today. The charter has been signed by lenders covering 85% of the UK market, and provides support for two groups of people in particular.

The first group is those who are worried about their mortgage repayments. If they want to switch to an interest-only mortgage or extend their mortgage term to reduce their monthly payments, they will be able to do so, with the option of switching back to their original mortgage deal within six months without any affordability check or credit score impact. For most people, the right course of action will be to continue to make payments on their current mortgage. That will always be the best option, and will always mean that they pay less interest overall. However, this new measure means that people will be able to opt for a lower-cost approach for six months with full reversibility, giving them the peace of mind of knowing that they can try out a new approach and still change their mind later.

The measure will take effect in the next few weeks. It means that a home owner with a £200,000 property with £100,000 outstanding on their mortgage over 15 years can change their payments—with no immediate impact on their credit rating—by extending the mortgage term by 10 years, which could save over £200 a month, or moving to interest-only payments, which could save over £350 a month.

A further measure for this group of customers means that if they are approaching the end of a fixed-rate deal, they will be offered the chance to lock in a new deal with the same lender up to six months ahead. However, they will still be able to apply for a better like-for-like deal with the same lender, with no penalty if they find one, until their current deal ends. That will provide people with more flexibility and optionality to find the best deal for their circumstances.

The second group of people we are supporting is those who are at real risk of losing their home because they fall behind in their mortgage payments. Mortgage arrears and defaults remain at historically low levels, with under 1% of residential mortgages in arrears in 2023, and are at a level lower than just before the pandemic. None the less, for the families involved it is extraordinarily distressing to lose their house, so we will do all we can to support people who find themselves in such a challenging financial position.

As part of our strong regulatory framework for mortgage holders, banks and lenders already provide tailored support for anyone who is struggling and deploy highly trained staff to help such customers. Support offered includes temporary payment deferrals and part-interest part-repayment, as well as extending mortgage terms or switching to interest-only payments. To supplement that, we have agreed as part of the mortgage charter that in the extreme situation in which a lender is seeking to repossess a home, there will be a minimum 12-month period from the first missed payment before there is a repossession without consent. Anyone who is worried that they could be in this situation should know they can call their lender for advice without any impact at all on their credit score. Lenders will also provide support to customers who are up to date with payments to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability test, and provide well-timed information when their current rate is coming to an end.

Taken together, these measures should offer comfort to those who are anxious about the impact of higher interest rates on their mortgage, and provide support to those who do get into any extreme financial difficulties. The mortgage market itself remains robust, and the average home owner remortgaging over the last year had close to 50% loan to value, indicating that most people have considerable equity in their homes.

Tackling inflation is the Prime Minister’s, and my, number one priority. We said we would halve inflation not because it was an easy thing to do, but because it is the right thing to do, and we will not flinch in our resolve, because we know getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and on businesses. That is why we will seek to remove inflationary pressures in our economy, not stoke them. That is what the measures I have set out today will help to do, and I commend this Statement to the House.”

20:48

[Lord Livermore (Lab)]

My Lords, when the Chancellor made his Statement on Monday, he did so against a rapidly deteriorating backdrop for Britain’s mortgage holders. Interest rates have risen 13 times to a 15-year high of 5%, but inflation is stuck at 8.7%. The average two-year fixed-rate mortgage has increased from 2.6% to well over 6%. Average mortgage costs this year will increase by £2,900. Multiple lenders have withdrawn all new mortgage deals from the market, just as 1.5 million homeowners are set to come off fixed-rate mortgages.

The Resolution Foundation estimates that home owners will pay a combined total of £15.8 billion more in mortgage payments every year by 2026. Data from the Institute for Fiscal Studies shows that, on average, mortgage holders will see their payments rise by £280 per month, equivalent to 8.3% of their disposable income, with some 1.4 million people losing a huge 20% of their disposable income. The latest data from the Bank of England shows that the value of outstanding balances with arrears increased by 9.5% in the first quarter of this year. These figures all show the level of pain among mortgage holders, which will only grow in the months ahead.

We should, of course, remember that those who have bought their own homes have done nothing wrong. They have worked hard, saved for a deposit and taken pride in having a home of their own. But the security that comes with that has, for many, turned to dread, as month after month they receive a letter from their lender telling them their bills are going up by hundreds of pounds a month.

The Government often argue that responsibility for this rapidly deteriorating picture lies in global factors, yet the figures suggest a different story. The latest data show that a typical household in Britain is now paying over £800 more per year for their mortgage than in Germany, £1,000 more per year than in Ireland and £2,000 more per year than in France. The UK has the highest inflation in the G7, with core inflation last month rising to 7.1% in the UK, a 31-year high, while in other advanced economies, including in the eurozone and the US, it has started to fall. Food prices in the UK are currently rising 20% faster than in France, 30% faster than in Germany and more than three times the rate in the US.

Interest rates first spiked dramatically last autumn when the Government gambled with people’s livelihoods in their disastrous mini-Budget, sending markets into meltdown. Since then, things have only got worse, as the instability the mini-Budget created has continued. Now, with inflation higher for longer in the UK than in other similar economies, the two-year gilt yield today stands at 5.24%, a new 15-year high, half a percentage point above that at the time of last year’s mini-Budget, and above its US equivalent. Markets now see a 70% chance of rates over 6% by the end of this year.

In this context, with millions of home owners struggling to pay their mortgages and with private sector rents rising by more than 10%, the Government’s new mortgage charter is clearly necessary, but it is also clearly insufficient. It is insufficient because, while many banks and building societies are doing the right thing by their customers, a purely voluntary set of measures will leave more than 1 million households missing out on the mortgage support they need.

Last week the Labour Party set out proposals to help people across Britain who work hard, pay their mortgages and rents and are now being hit hard by rapidly rising payments. Labour’s measures are compulsory, across the board and required of lenders. We would require lenders to allow borrowers to switch to interest-only mortgage payments for a temporary period, or to lengthen the term of their mortgage. We would require lenders to reverse any support measures when the borrower requests it. Were we in Government, we would bring in a renters’ charter to end no-fault evictions and introduce four-month notice periods for landlords. It is also important to say that we should not see a big fiscal injection into the economy at this time. If that happened, interest rates would go up even more, crippling the hopes and opportunities of the very people we seek to help.

I therefore ask the Minister the following questions. The Chancellor said in his Statement that the voluntary measures would cover 85% of the mortgage market. That leaves more than 1 million families who are not covered because their lender has not signed up to this scheme. Will the Government now consider making the measures in their mortgage charter mandatory? The Chancellor did not mention renters in his Statement, but many are paying higher rents because their landlords’ mortgage costs have gone up. What plans do the Government have to help them? Despite recent increases in the rates that lenders are charging on mortgages, there has not been an equivalent rise in the rate they offer on savings. This gap has grown by more than 50% for two-year products. What action will the Government take to ensure that savers see the full benefits from higher rates, just as borrowers are feeling the full pain? Finally, why does the UK continue to have the highest inflation rate in the whole G7? I thank the Minister in advance for her answers to these specific questions.

[Baroness Kramer (LD)]

My Lords, I rarely speak to such a thronged House. The number that we should focus on is core inflation, which removes the volatile issues over which we have little control and which has shockingly risen to 7.1%—a 31-year high, as the noble Lord, Lord Livermore, said. This number is key to interest rate rises and captures the sheer economic incompetence of the Government, as well as their wholly inadequate trade relationship with Europe post Brexit—the sharp drop in exports, British firms removed from supply chains, a collapse in business investment, the fall in sterling, customs friction driving up the cost of imports, labour shortages and incredibly low productivity.

Three groups of people will be particularly hard hit by the sharp and continuing rise in interest rates: mortgage holders with variable-rate or expiring fixed-rate mortgages, renters whose landlords face significantly higher mortgage costs and small businesses with short-term loan exposure. The mortgage charter will help some to push the pain into the future, but at a price. The hardest hit who face repossessions will feel the full force only after the next general election; I understand the Conservative strategy there.

Unlike this Government, I do not think it acceptable for the hardest hit, who face the destruction of their family finances, to take the bullet for the economy as a whole. Will the Government now put in place the emergency proposals that these Benches have made to assist those in the toughest position, who will get no help from the banks because they are regarded as unattractive customers? This is a voluntary system and the banks will use their standard approach of favouring customers with whom they want long-term relationships and denying opportunity to those with whom they do not.

Reversing cuts in the bank levy and the surcharge would do more than cover the cost of this, and I am with the noble Lord, Lord Livermore, in saying that the banks are really in a position of profiteering at this point because of their rejection of any pressure to share higher interest rates with their savers.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank both noble Lords for their contributions and their questions. The reason we are having this Statement today is the action the Government took on the back of the announcement by the Bank of England last week to raise interest rates to 5% as the UK, like other countries, grapples with high inflation.

There are many different international comparators that can be used in this debate, but the primary drivers of the inflation we are seeing in the UK and across the world are the global shock to energy prices, the impact on supply chains still coming out of the Covid pandemic and, in the UK and countries such as the US, tight labour markets. Interest rates are higher in the United States, Canada and New Zealand, and that will all be impacting mortgage payments. When it comes to inflation—and noble Lords have talked about the measure of core inflation—the UK is not alone here either, with 14 EU countries having core inflation higher than the UK’s.

First and foremost, the Government’s aim is to tackle inflation; our number one priority is to halve inflation by the end of the year to ease the cost of living pressures for everyone. That means that we back the Bank of England in its work to drive down inflation and we will not take measures that would potentially make this worse. We have looked at what we can do to help families who are struggling with the higher interest rates that we now see. We already have a big package of support in place to support families with the higher cost of living that we are seeing—one of the largest support packages in Europe, worth £94 billion, or £3,300 per household on average.

On Friday, my right honourable friend the Chancellor went further, with the mortgage charter for families up and down the country. The noble Lord, Lord Livermore, asked whether we would make the mortgage charter mandatory. I say to him that, when the mortgage charter was announced on Friday, it covered 75% of lenders but by Monday that had extended to 85%. We encourage all lenders to sign up to the charter.

There is the question of how one might make the charter mandatory. The Bill that we have just completed could potentially have had a power of direction within it towards the regulators, but I do not believe that is something that the Labour Party supported; in fact, it welcomed that such a power was not in the Bill. Thinking about the powers by which we can implement policies is perhaps something that we have to consider more carefully in government than in opposition.

The noble Lord asked what we are doing for renters. He mentioned the Opposition’s commitment to end no-fault evictions. I am sure that he was pleased to see the Renters (Reform) Bill that has just come before Parliament, which will do just that—the result of a commitment by this Government, long-standing for a number of years, to take action there. As has been noted, the action through the mortgage charter where landlords are mortgage holders may also provide some help and support to renters along with our wider cost of living support.

The noble Lord rightly said we should not do anything to inject money into the economy right now. It is for the Labour Party to explain how that squares with their own plans to borrow £28 billion a year until 2030. For the Government’s part, we will continue to focus on getting inflation down, supporting the Bank of England in its work and showing responsible fiscal policy.

The noble Lord asked about action to ensure that rising interest rates are not just passed on to mortgage holders but that savers would also see the benefit of those changes. My right honourable friend the Chancellor met the FCA again today along with other regulators, including the CMA, Ofcom and Ofwat. Among the measures agreed at that meeting, the FCA agreed to deliver a better deal for savers by driving competition, including reporting by the end of July on how the savings market is supporting savers to benefit from higher interest rates. The Government fully support the FCA’s review and the new consumer duty, which gives it stronger powers to take action if necessary.

We stand by families who are facing higher costs at this time, with both direct help to support the cost of living and specific help to support mortgage holders, all the while remaining committed to tackling high inflation. That is the core of the challenge that we face today and is the Government’s number one priority.

[Baroness Kramer (LD)]

My Lords, could I ask the Minister, when she goes back, if she could look a little more closely at the numbers she provided us with for core inflation? I just took a quick look to make sure that I had not got this wrong. The European Union as a whole has core inflation at 6.13%. In the eurozone it is significantly lower at 5.3%. There are some outlier countries, such as those which have particularly taken Ukrainian refugees. Hungary has a distorted number, as have a couple of the other countries which are very close, such as Estonia and Latvia. For the kind of economies against which we compare ourselves, we are definitely on the high-water mark and by some measure.

[Baroness Penn (Con)]

My Lords, I am always happy to go back and double-check my figures. The two averages quoted for the euro area and the eurozone are not what I was referring to. I simply said that 14 countries in the EU have core inflation that is higher than the UK’s. That would not just indicate a few outliers, but of course I am happy to go back and double-check and write if I need to.

21:05

Sitting suspended.