Mortgage expert: Government’s ‘no questions asked’ policy is dangerous

Allowing people to change their mortgage to interest-only or defer their payments on a ‘no questions asked’ basis is dangerous, because it discourages consumers from communicating with their lender or broker.

That’s according to a warning from Ray Boulger, senior technical manager of brokerage John Charcol.

In the scenarios where people are unlikely to ever repay their mortgage, Boulger said they need to get the full facts from their lender or broker and cash out of the market before they get into deeper trouble.

The rules and Jeremy Hunt’s comments

Following discussions with mortgage lenders led by Chancellor of the Exchequer Jeremy Hunt, mortgage lenders must offer customers the option of switching to interest-only payments and extending mortgage terms for six months. This will happen without an affordability check or affecting their credit score. In other cases, a temporary payment deferral or part interest-part repayment options will be available.

Many lenders already offer these solutions, but it seems their availability is now being set in stone.

Hunt said: “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 and no impact on your credit score.

“That gives people a powerful new tool for managing their monthly budgets – and it will begin taking effect within the next two weeks.”

Customers who are up to date with payments will be able to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.

Other policies introduced are: customers won’t be forced to have their homes repossessed within 12 months from their first missed payment; and people approaching the end of a fixed rate deal will be offered the chance to lock in a deal up to six months ahead.

A dangerous policy

To Boulger this ‘no questions asked’ policy is very troubling.

He said: “With regard to the payment holiday, interest-only or party interest part repayment – they were already in lenders’ toolkits anyway

“The difference is people can get them ‘no questions asked’.

“I think that’s a bit dangerous as previously people had to speak to their lender and prove they couldn’t afford their mortgage.

“Some borrowers will be less likely to go back to their lender or broker, which could make the situation worse.”

If mortgage experts are able to speak to customers, they can ascertain whether the borrower will be able to make their payments again.

Boulger added: “You need to differentiate between temporary problems and situations where people’s circumstances have changed so much that they are unlikely to recover.

“The latter scenario could be caused by a relationship breakdown, or they had an accident and can’t work and don’t have life insurance. They will be in the minority but it happens.

“If they are going to be in difficulty the majority of people with equity will be able to sell the property and still have cash in hand.

“In a falling market, if you are not paying the mortgage or the interest your debt is going to be increasing and your capital value decreasing – which is a double whammy.

“In that scenario you’re better than taking the hit earlier than waiting and making it worse.”

Is the FCA independent or not?

Bougler also commented on the seemingly dictatorial approach from the government, when it comes to altering the Financial Conduct Authority’s policies.

Normally when the FCA changes its rules the regulator releases a consultation paper, giving the mortgage and housing industry two months to respond. Then there’s three months to review replies, as well as months spent implementing the new rules. In many cases it can take a year or so for the full process to happen.

In this case however the changes could come in next month, and it seems the normal due process is being overridden.

Boulger said: “It questions the FCA’s independence.

“The government says the FCA and Bank of England are independent when it suits them, but it seems the Chancellor has produced these new rules.

“This is not in my view an agreement between lenders and the Chancellor – it’s more the Chancellor telling lenders.

“It’s a bit like Michael Gove saying developers have to pay for cladding problems.”

He added: “With a normal FCA consultation, lenders would have the opportunity to respond and express concerns, which might include them saying that for some borrowers having ‘no questions asked’ is against their interests.”

Six months of flexibility is not enough

While some flexibility around switching from a regular mortgage to interest-only is welcome, Boulger thinks six months is far too short a time to switch back and forth.

He reckons for that rule to have a big impact borrowers should have that flexibility for at least three years, as it’s rare for circumstances to change massively in six months.

Boulger does see a positive in lenders not having to apply affordability tests every time the mortgage is altered however.

Before the global financial crisis saw the introduction of tighter mortgage regulation it was common for lenders to use mortgage overpayments to fund underpayments further down the line.

It’s now rarely used because lenders would have to apply another affordability test to alter a borrower’s deal, but now flexibility is returning that approach could make a comeback.

Boulger said: “If this situation leads to something like that kind of facility it would be a good consumer outcome.”