Mortgage prisoners may finally be able to switch to a better deal after the City watchdog relaxes its rules
Mortgage prisoners locked into expensive rates have been offered a potential lifeline after the financial watchdog relaxed its rules.
The Financial Conduct Authority confirmed today it has ‘removed barriers that stop some mortgage customers from finding a cheaper mortgage deal’, helping borrowers when it comes to remortgaging away from their existing provider
It also announced plans to force all institutions that own mortgage books, whether they’re regulated or not, to alert borrowers to the rule changes and suggest they could get a better deal by remortgaging elsewhere.
The FCA estimates that 140,000 would save money if they were able to switch onto a new deal
Up to half a million mortgage borrowers in the UK have seen their home loan sold onto inactive or unregulated lenders, meaning their mortgage is now owned by a company or fund that can’t offer them a remortgage.
Of those, the Financial Conduct Authority estimates that 140,000 would save money if they were able to switch onto a new deal by remortgaging to another lender.
However, strict rules governing how lenders assess whether they can afford it have left them so-called ‘mortgage prisoners’.
These mortgage prisoners find themselves unable to qualify for a new deal with a different lender and so end up locked into providers who are not competing for new business and charging high interest rates.
The FCA claims today’s rule change will allow lenders to use ‘a different and more proportionate affordability assessment for customers who meet certain criteria’.
This would include allowing borrowers who are up-to-date with their existing mortgage payments and who are not looking to move house or borrow more to be accepted by a new lender – even where their income and expenses wouldn’t normally pass that lender’s affordability calculations.
However, earlier this year mortgage lenders said publicly that even if there were to be a rule change such as this, they still wouldn’t be able to help free many mortgage prisoners.
Jackie Bennett, director of mortgages at UK Finance – the lender trade body, appeared to reiterate this today.
She said: ‘The regulated mortgage industry supports all measures to help creditworthy borrowers on reversion rates switch to a better deal, and has already implemented a voluntary agreement that led to 26,000 customers of active lenders being offered a new deal in 2018.
‘We look forward to the FCA publishing up to date information on borrowers with inactive firms, allowing the industry to develop products that meet these customers’ needs where individual active lenders have the commercial and risk appetite to do so.
‘However, there is a risk that the regulator’s changes could unduly raise expectations among some customers on reversion rates who must now be contacted but may find they are unable to secure a new mortgage.
‘In particular, this may include customers of inactive firms who are in negative equity, in current or recent arrears or on an interest-only mortgage with no repayment strategy.’
Bennett committed to working closely with the regulator nonetheless, but urged the government to consider what more could be done to help customers of inactive firms who are unlikely to benefit from the new rules.
Earlier this year, This is Money proposed some alternative measures to support mortgage prisoners, including debt forgiveness and allowing lenders to waive stress testing, a rule that currently sits under the purview of the Prudential Regulation Authority – a regulator that is separate from the FCA.
What is a mortgage prisoner?
Mortgage prisoners are borrowers who were given a mortgage – most likely pre-financial crisis – but who are now trapped on high variable rates, unable to remortgage to a cheaper deal because they no longer fit the profile of a ‘good’ borrower.
This can be down to a number of things: perhaps they borrowed a lot on interest-only and can’t repay the outstanding capital; they could have borrowed on one of Northern Rock’s infamous Together mortgages at 125 per cent of the value of the property, meaning they’re still in negative equity; they might have retired since first taking their mortgage; or seen a drop in their income.
Whatever the reason, they’re stuck, and they’re not alone: the latest official figures calculate there are around 200,000 mortgage prisoners in the UK.
In January this year the Treasury Select Committee asked the financial regulator to ‘act swiftly’ to help mortgage prisoners, particularly those trapped with firms that no longer offer loans.
Currently an estimated 20,000 homeowners are locked into mortgages with lenders that are no longer active – with a further 120,000 stuck with firms that aren’t regulated by the UK’s financial watchdog, the Financial Conduct Authority.
If these borrowers were with active lenders, the previous rules would let their lender remortgage them onto a cheaper deal. For those with inactive lenders, it’s simply not been an option until now.