The Financial Conduct Authority (FCA) is considering changing mortgage rules in the UK. The new rules would allow homeowners struggling with the cost of living crisis to switch to interest-only payments.
Interest Only Mortgages
Interest-only mortgages were once common in the UK housing market for owner-occupiers. The loans became heavily regulated after the global financial crisis (GFC). This was in response to many borrowers being offered loans with no plan on how to repay the capital.
How big is the problem?
UK Finance is an industry trade body and the collective voice for the banking and finance industry. They estimate that 1.8 million homeowners in the UK will come to the end of fixed-rate deals in 2023. These owners will have the option to have their loan revert to the standard variable rate, or lock-in a new fixed rate. It is anticipated these homeowners will face steep increases in repayments and in some scenarios their rate will quadruple.
UK Fixed Rate mortgages
Average fixed-rate mortgages have fallen by more than 0.5% since the start of November. Interest rates spiked at the start of November in response to the Truss government mini budget. Among the top ten UK lenders: average 2-year rates hit 5.90% at the start of November but have fallen back to 5.38%. Average 5-year rates have dropped from 5.67% to 5.07% over the same period.
Standard Variable Rate
Standard variable rates continue to climb, with the average across the top ten lenders now at 6.30%.
How will it work?
Customers can ditch repayment loans temporarily under the plans laid out by the FCA. Specific details are not available, the FCA is consulting on the guidance over the next 10 days.
The proposals will allow borrowers to switch to interest-only deals without a formal repayment plan.
The planned FCA guidance advises banks to let homeowners at risk of payment shortfalls switch to an interest-only loan without an agreed repayment strategy.
However, a credible repayment plan would be required for a permanent switch.
What does this mean for property investors?
You might think this is not particularly relevant to property investors. But if you do you would be wrong! Property prices in the UK fell by around 18% from a peak in 2007 to a trough in 2009 following the Global Financial Crisis.
This action by the FCA highlights how focused the UK government and regulators are on ensuring property prices do not crash in response to the cost of living crisis and high levels of inflation. The UK government has already intervened in the housing market during the covid crisis to sure up prices.
Property market crash
If you are eagerly waiting for a huge crash in the property market, you might end up being disappointed. There is no doubt that current economic turbulence and pricing will moderate. However, low levels of supply of housing, high levels of immigration and building construction inflation mean that pricing is unlikely to be soft for long.
Are you thinking of buying a property in the UK?
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