/ Money

Here’s how we can free ‘mortgage prisoners’

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.

Old rules

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.

Lender responsibilities?

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.

Our proposals

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?

Comments
Guest
Patrick Taylor says:
16 August 2018

It is regrettable that Which? did not mention it at the time the tightening on mortgage lending terms was introduced as it was very obvious what the effects would be and it was being written about in the general Press in 2010. It is amazing this unfairness has gone on so long.

That the FCA made a pigs-ear of it is not terribly surprising. That people who were adequately servicing their mortgage were not being allowed to port it, or to take a reduced mortgage when downsizing as they did not meet the latest lending criteria was truly absurd.

I do believe that Which? being in receipt of fees from the mortgage providers for it’s then newly formed and loss-making Mortgage Service simply did not wish to champion these affected consumers and fight the mortgage lenders for a commonsense view to prevail.

Guest

Thanks for this very useful observation, @dieseltaylor, which I have passed on to the Which? Mortgage and Money teams.

Guest
Patrick Taylor says:
16 August 2018

Just in case it helps
” MoneySavingExpert has been fighting to help mortgage prisoners for several years now – Martin criticised the directive back in 2015 in his blog: I’m taking on the EU Mortgage Credit Directive – it’s going to create many mortgage prisoners.” ……
“The FCA credits MSE for originally suggesting the survey on consumers’ ability to switch mortgage, cited in the report. The survey found 2% of existing borrowers who would benefit from switching were unable to switch to another deal.”

BTW the enforcement of EU Directives is very much up to the individual country on how it is done. And in a great case of biter bit:
” Ex-FCA’s mortgage market reformer denied mortgage”
ft.com/content/97bc91c4-52be-11e8-b3ee-41e0209208ec
this from the referenced blog

“Was this a taste of my own medicine? Sort of. I’ve now experienced for myself the impact of the Mortgage Market Review (MMR) on the market – but not the impact of the rules themselves: there’s nothing in the rules that prescribes a minimum period of trading or the type of evidence of income I need.

What I, like many others have experienced is the way the rules have been interpreted by the leading players who dominate the market and adopt a one-size fits all, highly risk averse approach, calibrated with a band width aimed at avoiding the regulator rather than helping customers.”

Guest

Indeed this is very helpful, I’ve passed it on as well!

Guest
PETER says:
18 August 2018

Yes, I am one of these prisoners, with the added thing of also been a “Sold on client” and the current company to do deal with new lending etc: What is my get out options? as not covered in article. Yes I am kicking myself by the way

Guest
Roy Robart says:
25 August 2018

Join this ‘Mortgage Prisoners UK’ Facebook page if you’d like to discuss your situation with others in the same predicament or keep up with what’s happening on this subject in the media: https://www.facebook.com/groups/324163371301670/?ref=bookmarks