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Mortgage Prisoner? Rule Changes Set to Help You Move to a Cheaper Deal

Posted 9 December 2019 by Nick Parkhouse

Are you a mortgage prisoner? If so, changes to lending rules mean you may now be able to access a cheaper deal. Here's all you need to know...

In recent years, thousands of people have become ‘mortgage prisoners’. As underwriting criteria has tightened, many homeowners have been left on higher interest rates as they no longer fit the profile of a ‘good borrower’.

Now, however, the Financial Conduct Authority (FCA) has introduced new rules that should make it easier for mortgage prisoners to access cheaper deals. Keep reading for everything you need to know.

What is a mortgage prisoner?

Mortgage prisoners are borrowers who were given a mortgage in the last few years – often before the financial crisis – and who are now trapped on higher interest rates because a lender no longer considers them a ‘good’ customer.

There are various reasons why you could be trapped on a high Standard Variable Rate (SVR):

  • You took out an ‘interest only’ mortgage and you have no way of repaying the capital
  • You are in negative equity
  • Your income has reduced since you took out your original mortgage – perhaps you have retired or become self-employed
  • Your credit rating has worsened since you took out your mortgage – maybe you have missed some payments or had a default or CCJ registered.

Read: Everything you need to know about negative equity

How big is the problem or mortgage prisoners?

The latest official figures show that there are around 200,000 mortgage prisoners in the UK. And, a further 120,000 are stuck with firms that aren't regulated by the UK's financial watchdog, the Financial Conduct Authority.

In addition to this, 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.

Read: Your complete guide to remortgaging

FCA changes rules to help mortgage prisoners

Since 2008, mortgage affordability checks have become more stringent and rules have tightened lending standards. This has left many thousands of borrowers stuck on higher interest rates as they no longer ‘fit’ a lender’s criteria.

As interest rates have fallen to historic lows, thousands of consumers have been left paying interest that is significantly above the market rate through no fault of their own.

Now the FCA has introduced new rules which allow lenders to use more ‘proportionate’ affordability checks for customers who meet certain criteria, such as being up to date with payments under their existing mortgage and not looking to move house or borrow more.

Christopher Woolard, the executive director of strategy and competition at the FCA, said: “Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm.

“Mortgage prisoners are often stuck on more expensive mortgages. We are removing barriers to switching in our rules and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible.”

The FCA has made changes including:

  • Simplifying the definition of a ‘more affordable mortgage’
  • Allowing eligible consumers to finance intermediary, product and arrangement fees through the new mortgage

Additionally, until now, borrowers with ‘inactive’ lenders have been unable to move into a cheaper deal. They have been locked into providers who are not competing for new business and so are charging higher interest rates.

Now, the City regulator has confirmed that it has removed barriers that stop these customers from switching.

Christopher Woolard, the executive director of strategy and competition at the FCA, said: “We are also taking steps to help those who have mortgages with inactive lenders or unregulated entities to ensure that they are aware that they may now be able to switch and save money.”

Personal Finance Society chief executive Keith Richards says: “This is a long overdue and a most welcome change, which potentially delivers fairer treatment and better outcomes for consumers.”

“The FCA’s decision to allow additional borrowing to finance fees will increase access to mortgage advice.”

New rules welcomed but a note of caution sounded

While the rule changes have been broadly welcomed by the industry, some experts have sounded a note of caution. They remain concerned that not all mortgage prisoners will benefit under the amended regulations.

Jackie Bennett, director of mortgages at UK Finance, the lender trade body, 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.

“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.”

Debt charity StepChange head of media Sue Anderson also welcomed the news but says that there is still a lot more work to do.

She says: “While the FCA’s changes will help some customers, they won’t help people with an imperfect payment history, which may be the case for some people facing problem debt.

“And yet, some of these borrowers may have fallen behind precisely because of the high cost of the mortgage in which they are trapped, potentially held with unregulated owners of loan portfolios.

Read: What if I can’t pay my mortgage? Your guide to mortgage arrears and repossession

“Although this problem remains, at least the FCA recognises that there is a case for government looking at extending the perimeter to bring unregulated entities into its orbit, which might reduce the future disparity between the treatment of different sets of disadvantaged customers,” she adds.

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