© Reuters. FILE PHOTO: A row of for sale boards are pictured in London January 4, 2008. REUTERS/Luke MacGregor (BRITAIN)
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By Kylie MacLellan and Muvija M
LONDON (Reuters) -British banks agreed on Friday to give homeowners who fall behind on mortgages a year of grace before foreclosing and to protect credit scores of borrowers who change loan terms, as the government sought to ease the strain of rising interest rates.
Finance minister Jeremy Hunt summoned representatives of British banks and other lenders a day after the Bank of England raised interest rates to 5.0% to fight high inflation.
“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,” Hunt told reporters after the meeting.
The new measures were likely to have limited immediate impact on lenders, since they do not require any significant fresh forbearance and are primarily designed to assuage concerns over credit scores.
The index of British bank stocks was down 1.14% by 1305 GMT after the details of the new measures emerged, broadly unchanged from morning trading and slightly underperforming a wider selloff in European shares.
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.
It was not immediately clear on Friday how long borrowers could extend for, nor what the impact on banks might be if significant numbers of borrowers take those options.
BoE Governor Andrew Bailey said on Thursday, shortly after the decision to take the 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% 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.
SLOW CHANGES
Two-year fixed-rate borrowing costs for British home-buyers topped 6% 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 homeowners than they did in the past. About 85% of mortgage holders are on fixed-rate deals, up from under 30% in the early 2000s.
However, most of those fixed rates last only for 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 they 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.
