Mortgage blog: Lenders slammed for trapping borrowers on higher rates

Posted 18 July 2014 by Keith Osborne

One of the leading figures in the mortgage industry has hit out at lenders that are using new rules to ‘trap' borrowers on more expensive mortgage rates. An increasing number of borrowers have complained about the actions of their lender after the City regulator warned it would not tolerate lenders that treat customers unfairly.

Regulations designed to help borrowers get a better deal

Martin Wheatley, the head of the Financial Conduct Authority, has criticised lenders that are relying on new mortgage affordability rules to keep borrowers on expensive rates.

The new regulations, which came into force in April, require lenders to assess a borrower's income and expenditure in detail to ensure that they can afford their mortgage, both now and when interest rates rise.

The changes were made to end some of the irresponsible lending practices that led to the global financial crisis. However, they have also had the effect of making it difficult for existing borrowers to access the best mortgage deals.

The regulator introduced transitional rules for borrowers who simply wanted to remortgage or switch to a better deal without borrowing more but were unable to meet the new affordability requirements. These rules allow lenders to choose not to apply the strict new rules when offering a deal to an existing borrower - even if they fail the affordability test - as long as they don't want to borrow more money. These provisions were also designed to allow borrowers to take a fixed rate deal in order to protect themselves against future rate rises.

Lenders ignoring transitional rules

Despite the clear provision in the new regulations it has emerged that some lenders are ignoring these transitional rules. The Daily Telegraph has highlighted a number of cases where existing borrowers, particularly those on their lender's high standard variable rate, have been told they cannot move to a cheaper deal because they no longer meet the affordability tests. This is despite the fact that they do not want to borrow any extra money.

The newspaper says that the worst offender is Spanish-owned Santander, which has stopped existing borrowers from accessing lower mortgage rates on the grounds that they cannot afford them.

The financial regulator has issued a clear warning that it is not acceptable for lenders to ignore the special provisions put in place for these types of borrower. Mr Wheatley from the Financial Conduct Authority said: "When we hear reports that this provision isn't being applied, it's disappointing because it suggests that some lenders are not approaching the rules in the spirit that they were intended.

"Ultimately it is up to each individual firm to decide whether they offer a mortgage. They have to decide what level of risk they are prepared to take, and that's reasonable. But every firm also has a responsibility to treat their customers fairly and we would expect them to put good customer outcomes at the heart of everything they do."

He added: "Leaving customers stuck on higher-rate deals when the option exists for them to move to one that costs less doesn't fit with either of those criteria. Where issues are raised with us we will be talking to the lenders concerned to ensure that borrowers are being treated fairly."

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