Maintain the window of opportunity by resisting significant increases in interest rates until there is clear evidence of sustainable, broad based recovery, not just in output but in household incomes too
Theme 1: maintain the window of opportunity
To better inform its decision making on future rate rises, the Bank of England should work with the government and the ONS to develop accurate, reliable and timely data on household incomes across the income distribution. It should also amend its own NMG survey – potentially a very useful addition to earnings and income data from the ONS – in advance of this year’s questions being asked to ensure that sufficient data is collected to allow for distributional analysis.
Prepare for the imminent closing of this window, by being more proactive in ensuring that households can and do make appropriate re-financing decisions in order to lock-in today’s low rates for a defined period
Theme 2: prepare for the imminent closing of the window of opportunity
The Financial Conduct Authority should mandate standardised proactive pre-arrears engagement by lenders. In the same way lenders and the regulator recognised interest only mortgagors as an ‘at risk’ group, a second cohort can be identified. This should include borrowers who have previously fallen into arrears and have since recovered, along with those who took out self-certified, high loan-to-value or high loan-to-income mortgages pre-crisis. In addition, customers currently in forbearance should be included.
Lender contact would in the first instance encourage them to assess their financial position. They should provide them with a tailored assessment of the impact of a given range of hypothetical increases in interest rates on their mortgage repayments. To aid understanding, the design of these approaches and the information contained within them should be standardised across the industry. In addition, the lender should provide the customer with access to a standard budget planner tool (such as the one used by the Money Advice Service), detailing current income and expenditure. This communication would also provide direct referrals to a range of free agencies that can help with financial planning and debt advice.
The FCA should review the use of transitional arrangements by lenders to ensure that existing borrowers are not being unnecessarily prevented access to mortgage products that would improve their repayment position. This review should have explicit regard for Outcome 6 in the Treating Customers Fairly initiative. Where the FCA concludes that a lender has imposed “unreasonable barriers” on a customer changing product by failing to take advantage of the transitional arrangement option, the regulator should take sanctioning action.
Where further macro-prudential rules are deemed necessary as a means of cooling activity in the housing market, the regulator should design similar transitional arrangements for existing borrowers in order to avoid the creation of significant numbers of new mortgage prisoners.
It is important that potential mortgage prisoners are given at least one option to insulate themselves against rises in interest rates. All lenders should be obliged to offer a medium term (e.g. five year) fixed rate mortgage to existing borrowers as an alternative to the SVR. For prisoners, the rate would inevitably be above the current SVR and above the rates offered to lower risk customers, but it would at least provide certainty for those who want to take it up. It should be commercially determined, but it should also be ‘reasonable’ and transparent, set with reference to five-year swap rates and capital requirements, and with a cap on fees.
The FCA should require lenders to account for any future pricing changes in variable rate products with specific reference to a change in the funding cost environment. This extra regulatory vigilance in relation to the SVR is required while significant numbers of mortgage prisoners remain in the market and will allow the FCA to prevent changes in the SVR where it suspects lenders are taking advantage of their monopoly position.
Support those households that find themselves in debt crisis, by ensuring there is sufficient capacity among debt advisors and improving mechanisms for minimising the social and economic upheaval associated with exits from the housing market
Theme 3: support those households who find themselves in a debt crisis
We believe that additional funds generated by the arrival of consumer credit firms within the scope of the FCA should be used to boost provision of free debt advice, rather than being offset by reductions in levy payments made by existing regulated firms as is planned. The monies should be distributed beyond the face-to-face support provided by MAS partners to expand coverage across the sector and focus on prevention as well as cure. In particular, MAS should explore the potential for funding less expensive non-face-to-face debt advice channels.
In addition, we think the FCA should rebalance the burden of the MAS debt advice levy to include a higher contribution from fee-charging debt management companies, reflecting the negative externalities they have on individuals in debt and on the free sector more generally.
The industry should work together to agree the principles underpinning an approach to savings for clients under a debt management plan (DMP), Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO). Creditors should be prepared to accept that the debt management company has established an appropriate and reasonable amount of savings subject to specified industry-level guidelines about the purposes of this savings element. It should be clearly recognised as being for the purpose of meeting unbudgeted spending rather than for unexpected falls in income. In the event of falling income, debt advisers should continue to seek a reduced payment as is current practice.
In advance of a potential new wave of mortgage arrears, industry groups such as the BBA and CML should work with their members to establish a suite of standardised Assisted Voluntary Sale (AVS) options. This would deliver much needed visibility and consistency while still allowing the lender to vary its approach in order to best meet the needs of different borrowers. Customers taking this option should not be penalised by local authorities in relation to accessing housing assistance. To this end, lenders and advisers should provide local authorities with the external validation required to demonstrate the unsustainable nature of the borrower’s debts.
Homeownership may prove unaffordable for some as rates rise, but the cost of moving households between tenures can be high. Support for Mortgage Interest will continue to play an important role in helping those facing temporary difficulties associated with unemployment, but there is a need to develop a new approach for those facing structural affordability problems. To mitigate the social and economic costs associated with losing the home, the government should establish a new scheme – Help not to be Repossessed – to enable eligible borrowers to enter into shared ownership with a Registered Provider. Eligibility should be limited to households who took out their mortgages before 2009 and government grants to RPs for this time-limited scheme should therefore come from new funds rather than from existing pots.