New mortgage support measures agreed by lenders, Chancellor and FCA

On 23 June 2023 the principal mortgage lenders, the Chancellor and the Financial Conduct Authority (FCA) agreed new support measures for residential mortgage holders¹. The Bank of England's Financial Stability Report, published on 12 July 2023, records the agreement in those terms¹. The House of Commons Library describes the package as a "mortgage charter" aiming to encourage mortgage providers to support struggling customers, and notes that it did not include any further changes to Support for Mortgage Interest (SMI) or state financial support aimed at struggling mortgage holders².

The background is a sharp rise in borrowing costs. Bank Rate has increased from 0.1% to 5% since December 2021¹. Rates on a 75% loan to value mortgage fixed for five years stood at around 5% in June 2023, and rates for an equivalent two-year fixed-rate mortgage were around 5.5%¹. The Bank estimates that around half of mortgage accounts, around 4.5 million, have seen increases in repayments since mortgage rates started to rise in late 2021, and that higher rates are expected to affect the vast majority of the remainder by the end of 2026, around 4 million accounts¹. For a typical household, monthly interest payments would increase by around £220 if their mortgage rate rises by the 325 basis points implied by current quoted mortgage rates¹.

The Bank's report also sets out the wider picture. The Financial Policy Committee agreed to maintain the UK countercyclical capital buffer rate at 2%¹. The market-implied near-term path for UK Bank Rate is expected to peak at around 6.2% in early 2024, and market expectations are for Bank Rate to average around 5.5% over the next three years¹. In a severe stress scenario used to test major UK banks, the unemployment rate rose to 8.5%, inflation to 17% and house prices fell by 31%; the Bank said the banking system would remain resilient even if conditions turned out much worse than expected¹.

SMI, a separate government loan scheme, helps with the interest costs of mortgages and certain home loans for claimants of means-tested benefits, including Universal Credit and Pension Credit². Working-age claimants must receive Universal Credit for a three-month qualifying period, reduced from nine months in April 2023, while Pension Credit claimants can get SMI immediately². Loan caps are £200,000 for most working-age claimants and £100,000 for Pension Credit claimants². The amount payable is calculated using a standard interest rate, 2.65% in July 2023, based on the average mortgage rate published in Bank of England statistics². SMI loans are repayable with interest when the property is sold, ownership is transferred, when the claimant dies, or voluntarily; the interest rate for 1 July to 31 December 2023 is 3.28%². In the quarter ending February 2023 there were 11,787 households with an SMI loan in payment, against a caseload of more than 100,000 before the 2018 change to a loan scheme². The Government says it has "no plans to amend the calculation of SMI"².

Why it matters for households

The measures agreed on 23 June 2023 concern residential mortgage holders whose repayments are rising as fixed-rate deals expire¹. The Bank's figures indicate that around 4.5 million mortgage accounts have already seen repayment increases since late 2021, with around 4 million more expected to be affected by the end of 2026¹. The support package itself did not change SMI or add state financial support for mortgage holders². SMI remains a repayable loan secured against the property, with the standard rate used to calculate payments set at 2.65% in July 2023, below the rates many households face². The loan caps have not changed since January 2009².

What happens next

The Bank's report gives no further dated steps on the 23 June measures. It records that the countercyclical capital buffer rate was maintained at 2%¹. The Bank has launched a system-wide exploratory scenario exercise, described as the first of its kind¹. The Government has said it has no plans to amend the calculation of SMI². No further changes to SMI or to state support for mortgage holders have been reported as part of the 23 June package².