By Trevor Clawson.
Imagine for a moment that you’re shopping for shoes. You see a pair costing £100 and a swift glance at your bank account confirms that you can afford to make the purchase. Just then a cheaper pair catches your eye, so you decide to buy them instead. This time around, there’s no need to check the figures on your banking app. If you could afford the more expensive option, you definitely have enough money to buy shoes that cost twenty or thirty pounds less. It’s simple logic.
Sadly, it’s not a logic that applies to Britain’s so-called “mortgage prisoners.” These are people who have been quietly paying off their home loans – perhaps over a number of years – without displaying any signs of financial stress. However, when they try to switch to new and cheaper mortgage deals, they fall foul of affordability rules introduced after the great financial crash. As a result, many will be unable to switch and find themselves stuck on expensive ‘default’ rates.
It’s a hugely frustrating situation. Despite being more than able to meet their current mortgage commitments, those seeking to reduce their payments must, nonetheless, undergo a new affordability test. Paradoxically, they may be deemed as financially unfit to make the lower monthly payments.
But things may be about to change. Last week, in a letter to MPs, the head of the Financial Conduct Authority (FCA) outlined plans to unlock the jail doors and allow mortgage prisoners greater freedom to refinance their home loans.
“We want to remove the potential barriers in our rules to these customers seeking out a cheaper mortgage,” said Chief Executive, Andrew Bailey.
Who Are the Mortgage Prisoners?
There are an estimated 150,000 mortgage prisoners in the UK, and many of them are already paying more than they need to.
So how has this situation come about? Well, the roots of the problem date back to regulatory changes that took effect in 2014 in response to the 2007/2008 financial crash. In the years that led up to the global banking crisis, financial institutions were – to say the least – relaxed about their lending policies. So much so that 100%, no-deposit mortgages, valued at eight times salary were not uncommon.
Seeking to prevent a repeat of the great crash, regulators in the UK introduced tighter lending criteria. This had immediate implications for those who had taken out mortgages prior to the new rules being introduced. Put simply, if you borrowed under the old regulations and then tried to remortgage under the new regime, then there was a possibility that you wouldn’t pass the new affordability tests. And even those taking out a mortgage after the rule change might be caught in an affordability trap. For instance, circumstances change. If you signed up for a home loan when earning £40,000 but subsequently moved to a lower paid job, remortgaging could be difficult.
But that’s just one small part of the problem, affecting just a few thousand people. The bigger issue is this. Around 140,000 mortgage prisoners are making monthly repayments to companies that are not active or authorized lenders. One consequence of the great financial crash was the collapse of a number of financial institutions, including Northern Rock and Bradford and Bingley. In these cases, the debts were often sold to investment houses. These debt holders tend to be outside the banking system. They either do not lend or they are not authorized to do so. If a non-authorised or non-lending company holds your mortgage, it can be very difficult indeed to persuade a bank to offer a remortgage.
All of this matter because remortgaging can play an important role in helping homeowners to keep their monthly outgoings under control. According to financial services trade body,
UK Finance, a majority of customers switch to new deals when their old arrangements expire. For instance, when a cheap introductory deal reverts to a variable rate at a time of rising interest charges, it makes sense to shop around for a different deal rather than paying the new default rate. The difference can run to hundreds of pounds per month.
So, the FCA has pledged action to stop homeowners being prevented from seeking out cheaper deals.
“We intend to move the assessment from an absolute test to a relative test. Thus, the test would be whether the new mortgage costs are more affordable than the current costs,” said Andrew Bailey.
In other words, the test applied to remortgaging – in certain circumstances – will be based on assumption that if you are already capable of making regular payments you will be able to afford a lower cost option.
“In simple terms, this means that if a customer has been keeping up with payments, they should be able to switch to a cheaper rate regardless of whether they meet the FCA’s tightened affordability criteria,” said Bailey.
Not for Everyone
The proposed regulatory change won’t help everyone. For instance, the FCA is not throwing a lifeline to those who want to remortgage in order to free up cash.
“Our focus will be on those customers who are seeking to move to a cheaper mortgage and are not borrowing more,” said Bailey.
And the FCA acknowledges that helping those who are borrowing from unauthorized or inactive lenders poses a particular problem. Andrew Bailey called on the industry to show flexibility.
“There needs to be a ‘willingness’ from the industry to offer remortgaging opportunities to customers once regulatory barriers are removed,” he added.
For its part, UK Finance is stressing that while members have implemented a voluntary agreement to help those borrowing from active lenders, measures to improve the situation for those with unauthorised lenders will require regulatory intervention.
“The FCA has noted the progress made through the industry’s voluntary agreement to help borrowers with active lenders switch to a better deal. But it has also recognised that regulatory changes are needed to remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders,”
said UK Finance Director of Mortgages Jackie Bennett.
Mortgage prisoners shouldn’t be celebrating just yet. The chair of the Treasury Select Committee, Nicky Morgan, MP, is urging the FCA to proceed quickly. But the regulator will put its proposals out for consultation in the spring. Solid action to help those caught in the mortgage trap could take time to work through the system.