Mortgage prisoners could now move to better deals
4th November 2019
Some ‘mortgage prisoners’ could now find it easier to move to new, cheaper mortgages.
Under new rules, announced by the Financial Conduct Authority (FCA), lenders will be able to use more lenient affordability tests for borrowers who are currently trapped on expensive rates and want to move to a new deal. (1)
Lenders can choose to carry out a modified affordability assessment if the customer:
has a current mortgage
is up to date with their mortgage payments
doesn’t want to borrow more (other than to finance any relevant product, arrangement or intermediary fee for that mortgage)
is looking to switch to a new mortgage deal on their current property
"Mortgage prisoners are often stuck on more expensive mortgages,” said Christopher Woolard, executive director of strategy and competition at the FCA. (1)
“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.”
How people have become mortgage prisoners
Thousands of borrowers are up to date on their mortgage payments but trapped on expensive rates and unable to switch to a more suitable deal.
Many of them took out their mortgages before the 2007-2008 financial crisis. (2)
Lenders were then much more willing to offer loans if you had a very small deposit or even no deposit at all.
Regulations have since been brought in to tightened up affordability rules. Lenders must be satisfied that borrowers can still afford their mortgage repayments if they increased by 3%.
As a result, some borrowers who’ve never missed a payment are unable to move to a lower rate because lenders say they can’t afford to.
Other borrowers have become mortgage prisoners because they had a mortgage with a lender that collapsed or withdrew from the mortgage market.
Their mortgage was then sold to a firm not regulated to offer new loans, such as an investment firm. These are known as inactive lenders.
An FCA report estimated there were around 120,000 consumers who have mortgages with unauthorised firms who may benefit from switching to another mortgage. (3)
Under the new rules, inactive lenders must now get in touch with borrowers to let them know they may now be able to switch, and point them in the direction of relevant information.
What mortgage prisoners should do now
The new rules have come into immediate effect.
So if you’re currently a mortgage prisoner, and need some advice, speak to a fee-free mortgage broker. They could help you find a deal that best meets your circumstances.
“Many of these borrowers did nothing wrong, and have been victims of the wider financial crisis,” said Prakash Patel, a Mortgage Adviser at Trussle.
“But it’s a useful reminder of how important it is to build up equity in your property in order to cover yourself if property prices fall or your income goes down. It’ll improve your chances of successfully remortgaging, no matter what the future may hold.”
(2) FCA pg 30
(3) FCA pg 31