The FCA has estimated that 150,000 ‘mortgage prisoners’ are stuck on poor value deals due to changes in lending rules. But will the FCA’s proposals set them free?
Switching your service provider, whether it’s your energy, broadband or current account, can be an effort but it can save you a lot. Loyalty can cost.
But imagine taking the time to shop around, only to find that no other provider wanted you as a customer. Now imagine that it’s your biggest monthly outgoing at stake. This is the plight of a mortgage prisoner.
There could be a number of reasons why someone might struggle to get a new mortgage. For example, if you’re not up-to-date on repayments, have negative equity due to a fall in the value of your home, or want to borrow more.
But many customers have no such issues. The 150,00 ‘mortgage prisoners’ identified by the FCA are all up-to-date with repayments.
Almost all of these people took out their mortgage or last switched to a new lender before 2009, at the height of the financial crisis. They passed all of the affordability and credit checks, sometimes by self-certifying their incomes which was permitted back then. Many are self-employed.
But since then the rules of the game have changed. New affordability checks are more robust, so the same people who passed the old test can’t always pass the new ones.
These customers are likely to have been on expensive standard-variable rates for years, ever since their introductory deals expired. The FCA has not estimated how much these customers could be overpaying every year.
But for all mortgage products, we recently found that the average standard variable rate was 4.72%, compared to 3.01% for a fixed-rate deal.
So, in essence, these mortgage prisoners are being told that despite reliably paying back their mortgage for over a decade, and paying over the odds to boot, they can’t ‘afford’ a cheaper deal.
It gets worse. Mortgage prisoners are also more likely to have an interest-only mortgage. So many might want to switch to a repayment mortgage to help pay down their debt, but are unable to.
Lenders can waive affordability assessments to switch an existing customer to another deal. Customers need to meet certain criteria, including being up-to-date with payments and not borrowing more.
But not all lenders waive affordability assessments. And lenders have weak incentives to encourage their customers to switch to their better deals.
The FCA has found that there are 10,000 customers who could benefit from these internal switches.
The FCA has proposed a voluntary industry agreement with lenders to encourage them to switch existing customers to better deals.
But two years ago, then chancellor George Osborne wrote to lenders on this issue, and yet the problem remains.
So we want to see the FCA require lenders to switch this small group of customers to better deals, to help tackle this issue once and for all.
The bigger issue is the remaining 140,000 mortgage prisoners who have mortgages with lenders who no longer offer new mortgage products.
These customers would therefore need to switch to other providers. As they would then be a new customer, affordability checks can’t be waived.
Some are customers of firms who are authorised to lend but offer no new products. Others have seen their mortgage account sold on to a firm not authorised to lend.
The FCA has said there is no easy answer for these customers. We want to see the FCA work with the government on a potential scheme to help these customers onto better deals.
Are you a mortgage prisoner? How has it affected you?