Measures for mortgage holders

On 22 November 2022 the government approved, in agreement with the banks, measures for middle-income families with variable-rate mortgages. They covered the possibility of extending terms, temporarily freezing payments and moving to a fixed rate at lower cost. It was the response to the rise in payments that had been happening since interest rates began to climb. The detail of the eligibility requirements and application deadlines was what determined, in each case, whether the measures could be used.

For the families affected, the news could mean relief, but it also raised many practical doubts: who could benefit, what conditions applied, what each option cost and how to apply. As with any measure of this kind, the real benefit depended on the details of the rule and on the specific situation of each mortgage, so the conditions should be read carefully. The prudent course was not to take the benefit for granted until checking with the lender that the conditions were met.

What the measures offered

The measures covered three main options: extending the term of the mortgage to reduce the payment, temporarily freezing payments and moving from a variable to a fixed rate at lower cost. They were aimed at middle-income families with variable-rate mortgages, and were approved in agreement with the banks.

Each option has different implications. Extending the term lowers the monthly payment but normally increases the total interest paid. Freezing payments gives breathing space, but the debt keeps accruing interest. Moving to a fixed rate removes uncertainty, but means locking in a rate that may turn out higher or lower than the variable one in the future. There is no option that is best for everyone. The key to any relief is to understand that changing the terms of a debt does not remove it: it shifts it in time or in form.

Recognition of the problem

It was a recognition that the rise in rates was straining many families. When the government and banks agree relief, it is because the average burden of payments has become a real problem, and such relief usually has conditions and eligibility requirements worth knowing.

It is also a sign that, in situations of strain, channels of dialogue exist between lenders and customers that go beyond what the contract provides. Many families do not know they can negotiate with their bank before getting into difficulty. Raising the situation early, with clear documentation and concrete proposals, usually improves the chances of reaching a reasonable agreement. Banks have an interest in avoiding defaults, so they are usually open to studying solutions before the situation deteriorates.

Reviewing your own mortgage

Reviewing the terms of one’s own mortgage, even if not all the requirements were met, was a useful exercise. Knowing when the review is, what index applies, how much remains to be paid and what room the household budget has makes it possible to decide with information, and to talk to the bank with concrete proposals.

A good starting point is to gather the contract, the latest bill and the amortisation schedule, and to calculate with a simple simulator how the payment would vary at different index levels. With that data, the available alternatives can be compared and their costs and benefits weighed. If the situation is complicated, an adviser or a consumer information service can guide the steps to take. If in doubt between several options, it is wise to ask the lender for a written simulation of each, with the total cost over the life of the loan.

The sooner a problem is known, the more options remain to solve it.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.