London: British banks agreed on Friday give homeowners who fall behind on mortgages a year of grace before foreclosing, and protect credit scores of borrowers who make some changes to loan terms, as the government sought to ease the impact of rising interest rates.
“We agreed some very important things for people who are worried about their rates going up, not just the people who are in an extreme situation,” finance minister Jeremy Hunt said, a day after the Bank of England raised interest rates to 5.0 per cent to fight high inflation.
The new measures agreed on Friday were likely to have very limited impact on lenders, since they do not require any significant fresh forbearance and are primarily designed to assuage concerns over credit scores.
Lenders would have to wait a minimum of a year before repossessing a home if a homeowner who was behind on payments objected. Borrowers who agree a change to the terms of a mortgage - for example to pay only interest, or to extend the repayment period - for up to six months would face no impact on their credit scores.
Shares in British banks were little changed after the announcement.
Bank of England Governor Andrew Bailey said on Thursday, shortly after the decision to take Bank Rate to its highest since 2008, that he understood how the increase in borrowing costs would be hard for many people with mortgages or loans.
“But if we don’t raise rates now, it could be worse later. We are committed to returning inflation to the 2 per cent target and will make the decisions necessary to achieve that,” he said.
Hunt and Prime Minister Rishi Sunak have come under fire from the opposition Labour Party for not doing enough to help homeowners caught out by the jump in borrowing costs.
Two-year fixed-rate borrowing costs for British home-buyers topped 6 per cent this week, their highest since the aftermath of a disastrous mini-budget in September that made Liz Truss the shortest-serving prime minister in modern British history.
Changes to Britain’s mortgage market mean moves in interest rates have a less immediate impact on home-owners than they did in the past. About 85 per cent of mortgage-holders are on fixed-rate deals, up from under 30 per cent in the early 2000s, according to the BoE.
However, most of those fixed rates expire after up to five years. Around 800,000 mortgages will need to be refinanced in the second half of this year, followed by a further 1.6 million in 2024, out of a total of around 9 million residential mortgages, industry body UK Finance says.
The new minimum period for repossessions is unlikely to hit banks in the near term, since banks have said only a small number of borrowers are falling behind on payments at the moment.
Around 750 homeowner mortgaged properties were repossessed in the first three months of this year, according to data from UK Finance, well below levels seen in previous crises such as the 1990s housing crash.