How does this new 6 month cooling off period on interest only products work?

Sandwich

Like many people at the moment, I’m worried about the implications of the recent rate rises as my current fix ends in December and we have a high LTV as first time buyers. 

The government has come out today to announce this new deal with the banks, part of which is that people moving to an interest only deal will be able to revert to their ‘previous’ deal within 6 months with no penalty. That sounds potentially helpful but how does it work if your deal is ending? Could I move on to an interest only deal in December when my current fix ends, stay on that for 6 months until June, and then revert to my original product albeit at the higher rate (because the good fixed rate is over), but then also be free to shop around for whatever the best deal is at that point? Hopefully by then rates are a bit more sensible. 

jj_43

No, its not a new product. You will have to apply if you need to for the mortgage product you have when you get into difficulties.  

MWT

Sandwich said:

The government has come out today to announce this new deal with the banks, part of which is that people moving to an interest only deal will be able to revert to their ‘previous’ deal within 6 months with no penalty.

The words I heard were 'no impact on their credit score'...

It is not clear to me at least, if reverting to the previous deal involves bringing the payments current as though they never left it, or what ...

You can't just reverse a mortgage extension after few months without increasing future payments or requiring immediate settlement of the difference, so this is never going to be without a penalty, but it can be without markers on the credit file...

Sandwich

This is what I’m referring to: 

Hunt said lenders also agreed that if borrowers changed their mortgage to an interest-only contract, or extended the term of the deal, they could return to their original mortgage deal within six months without affecting their credit score.

adamL

All this announcement really is, is kicking the can down the road. It’s a short term reduction in payments to the interest only amount of whatever rate you have agreed with with the bank. You will still owe the money, including the money you haven’t paid in the 6 month period you weren’t on a repayment plan. In my opinion only do this if you been made redundant etc. 

comeandgo

Sandwich said:

This is what I’m referring to: 

Hunt said lenders also agreed that if borrowers changed their mortgage to an interest-only contract, or extended the term of the deal, they could return to their original mortgage deal within six months without affecting their credit score.

But your credit score is not used in conjunction with getting a mortgage, it’s what’s on the reports and that will show if someone needed to ask for financial help.  I’d only use the six months interest only if it was absolutely necessary.  

MWT

Sandwich said:

This is what I’m referring to: 

Hunt said lenders also agreed that if borrowers changed their mortgage to an interest-only contract, or extended the term of the deal, they could return to their original mortgage deal within six months without affecting their credit score.

Nothing in there says 'no penalty' ...

nic_c

I expect that more details will come out with some putting statements out there
e.g. 
https://www.ybs.co.uk/boe-rate-change

Tracker mortgage payments won't increase until March 2024, unless you contact us

• To reduce the impact of increased interest on your mortgage balance, you can increase your mortgage payments sooner by requesting a payment recalculation online.
 
• If we don’t hear from you, you’ll be charged a higher rate of interest from 9 July 2023 but we won’t increase your repayments. 
 
• As you’d be paying back less interest than you’re being charged, this will increase the amount you owe and could make a considerable difference to your mortgage payments from March 2024.

So I guess they'll put out something about the interest only stating it will not decrease the amount you owe.

nic_c

adamL said:

All this announcement really is, is kicking the can down the road. It’s a short term reduction in payments to the interest only amount of whatever rate you have agreed with with the bank. You will still owe the money, including the money you haven’t paid in the 6 month period you weren’t on a repayment plan. In my opinion only do this if you been made redundant etc. 

Definitely something of last resort when everything else is exhausted, not because you're a bit short.

It's similar to the relief, during the pandemic, at the end of the six months you'll either have to agree to extend your term by six months or increase your monthly mortgage amount. This idea of doing it for six months and then going back to original mortgage deal is wrong and will give some the wrong idea. Unless the bank or government are paying the capital part of your repayment for the six months (which is incredibly unlikely).