A Main Chained To A Small Wooden House

The end of the mortgage prisoner scandal may be nigh

The financial crisis is a bitter memory of what can go wrong when regulators lose control of markets. It seems hard to fathom now, but a little over a decade ago, buyers could acquire mortgages to the tune of 125 per cent of the home’s value (the Northern Rock Together mortgage being one of the most infamous), with only the most lax affordability checks standing in their way. 

It was a house built on sand which came crashing down in a devastating manner, and it was thus a non-negotiable imperative for the Financial Conduct Authority (FCA) – and the Financial Services Authority before them - to clamp down. They duly obliged, implementing strict new affordability rules in 2014 which encompassed the key consultation outcomes of the Mortgage Market Review. These regulations have been a game-changer in terms of how home loans are underwritten, and undoubtedly contributed to a safer financial system in this country. 

But the new rules have also meant misery for so-called ‘mortgage prisoners’, a 150,000-strong group who have found themselves paying thousands of pounds over the odds as a result of a perverse set of circumstances.

What is a mortgage prisoner?

Mortgage prisoners are those who find themselves stuck on a lender’s standard variable rate with no mechanism through which to remortgage. In almost all cases, this is due to them acquiring a mortgage prior to the financial crisis in 2008, but who now do not pass the stricter affordability checks and ‘stress tests’ implemented by lenders since 2014.

Often this is despite having made all their repayments on time, and doing so at considerable extra cost. That’s because standard variable rates invariably cost hundreds of extra pounds more each month when compared with remortgaging to a better deal. So, bizarrely, someone who can evidence years of full, prompt mortgage repayments at a higher rate are effectively rejected by other lenders on the grounds that they cannot afford to continue making payments at a lower rate. Arguably the most exposed of all though are those on interest-only mortgages, who face the grim prospect of having to pay off the loan in its entirety if they cannot remortgage at the point of maturity.

Many of these home loans written prior to the crash have since been packaged and sold to private equity firms and institutional investors too, and, given that many of these investors are not authorised to offer mortgages themselves, the sense of entrapment is ever-more acute. According to 2016 data from the FCA, roughly 120,000 of these mortgage prisoners’ loans are in the hands of unregulated firms, while the remainder are largely with regulated firms who are now defunct.

So what is being done for mortgage prisoners?

In fairness to the FCA, there was a significant level of consideration given to mortgage prisoners in the months leading up to 2014, including plans for a series of transitional arrangements which would permit lenders to waive the new affordability criteria in cases where homeowners were up to date with their repayments, and looking to switch provider (albeit only from lenders who were still active). However, this waiver was overturned by the Mortgage Credit Directive, and precious little support has been forthcoming for mortgage prisoners in the years since.

But at last, the wheels appear to be set in motion to bring an end to the despair endured by this contingent, with the FCA launching a consultation in March, and releasing subsequent proposals enabling lenders to revise affordability checks in cases where prospective switchers are up to date with their mortgage repayments, and are not seeking further borrowing. Effectively, it would give lenders the power to exercise their own judgment on a case-by-case basis. 

These proposals have been further strengthened following an inquiry commissioned by a cross party group of MPs, which sought to ensure that they catered for all types of mortgage prisoner, whilst also reviewing protections in place for vulnerable customers.

Additionally, most UK lenders have signed up to a scheme which will compel them to inform borrowers stuck on legacy deals with active lenders of the options at their disposal – provided that they are up to date with their repayments, have a minimum of £10,000 left to repay, and a term of at least two years over which to do it. Furthermore, the FCA has also put forward plans to oblige inactive and/or unauthorised lenders to write to customers advising them of the new proposals.

Such sensible measures will surely lift the crushing burden felt by mortgage prisoners and interest-only borrowers. It will also be of great benefit to those who do not yet even know they are mortgage prisoners, as most will likely be unaware of their situation until they apply to remortgage, and are declined.

When will these proposals take effect?

It would appear that these steps taken by the watchdog have already begun to bear fruit, with the likes of Ipswich Building Society launching a new product geared specifically towards mortgage prisoners. The lender will avail this deal to customers without executing affordability stress tests, and simply ascertaining whether the borrower has the capacity to afford the advertised rate itself. Ipswich has cautioned that such cases will be dealt with individually, and with a high degree of manual assessment. As such, it will not be in a position to process applications of this kind in bulk.

However, it’s a starting point, and, for mortgage prisoners, a hugely-welcome one at that. Indeed, although the rates on offer from Ipswich fall shy of market-leading deals, it will give these borrowers the opportunity to escape the trap they currently find themselves in, and open the door to a substantial and sustained saving in the years to come. 

The template has been set – now is the time for others to follow suit. Of course, this is something that the FCA needs to monitor closely, and any loosening of lending criteria cannot become a gateway to the bad practices of the past. But mortgage prisoners have suffered an unjust and unnecessary fate for too long. As such, this decisive action to rectify it, if overdue, is to be applauded.

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