Tens of thousands of people are trapped paying unaffordable mortgages at a time when many are under huge financial pressure due to coronavirus.
Remortgaging is one of the best ways for homeowners to reduce their monthly outgoings, yet this option isn’t available to an estimated 250,000 ‘mortgage prisoners’.
In many cases, mortgage prisoners are stuck paying their lenders’ standard variable rates – some in excess of 5% – fifty times higher than the current Bank of England base rate of 0.1%. This means they are paying hundreds, and in some cases thousands of pounds a year more than they would be if they were able to switch to remortgage to a more competitive deal.
Here, we explain how people have ended up becoming mortgage prisoners and what help is available to them.
- What is a mortgage prisoner
- What’s being done to help mortgage prisoners?
- Does that mean I have to wait until January to try and find a new deal?
- What if I have an interest-only mortgage?
- Does being over 50 make it harder for me to remortgage?
- What if I’m unable to remortgage and can’t afford to pay my mortgage?
- Support for mortgage prisoners
What is a mortgage prisoner?
A mortgage prisoner is essentially someone who is trapped on their current mortgage rate and can’t remortgage.
Many homeowners have become mortgage prisoners because of changes to mortgage rules following the Financial Regulator’s 2014 Mortgage Market Review (MMR). These changes have significantly tightened the affordability criteria that lenders have to use when granting a mortgage. Amongst other criteria, it means that anyone taking out a mortgage or remortgage must be able to prove that they could afford higher mortgage payments if interest rates rise in future.
The aim of these rules was to prevent another financial crash by stopping people taking out mortgages which they might struggle to afford later on.
The challenge is that by applying the new criteria to remortgages, as well as to new mortgages, means that there are a large number of people who were previously considered able to afford their mortgage, but now no longer meet the new criteria. Whilst clearly not the intention, lenders were essentially prevented from allowing these customers to remortgage by the regulator, even if they have made all their payments on time. It’s a truly tragic set of circumstances, where those who might be deemed more financially vulnerable (by nature of not meeting the new affordability criteria) are stuck paying the highest rates of interest, often through no fault of their own
The problem is particularly acute for mortgage customers of former lenders such as Northern Rock or Bradford & Bingley, both of which were nationalised during the financial crisis of 2008. Their mortgage books were put up for sale and were bought by unregulated funds or inactive lenders which don’t offer new mortgages and are often charging even higher rates of interest than their high street counterparts. Many people who met the previous affordability criteria of these former lenders, no longer meet the updated affordability criteria and as a result, are unable to remortgage to another deal with a normal lender.
What’s being done to help mortgage prisoners?
Tragically, the answer at the moment is very little. Mortgage prisoners were dealt a bitter blow last month (April 2021) after the government rejected an amendment which would have capped interest rates for those with ‘closed book lenders’. These are lenders which no longer offer mortgages to new customers.
The government has promised to explore other options which may help mortgage prisoners, although this provides cold comfort for those currently struggling with painfully high mortgage payments.
The FCA last year introduced new mortgage affordability rules which aim to help some mortgage prisoners switch to new deals. When you remortgage, lenders typically need to see proof of income and outgoings, and will also apply a ‘stress test’ so they can be certain you’ll be able to afford your mortgage if rates rise in future. The FCA has said that lenders can choose to use a “modified” version of these affordability rules to help those trapped in their current deals so that they are able to remortgage, as long as they are not moving home, are up to date with their repayments and don’t want to borrow any additional funds. The regulator is reviewing the effect of these rules and is expected to report its findings in November 2021.
The FCA has also urged lenders to pass on base rate cuts to mortgage prisoners and asked unregulated and inactive lenders to get in touch with customers whose introductory mortgage rates have finished to let them know they may be able to remortgage.
However, a report by the London School of Economics (LSE) on the plight of mortgage prisoners claims that current measures only help a few. The report, commissioned by Martin Lewis of MoneySavingExpert.com, wants the government to introduce a range of potential solutions including introducing interest-free government equity loans, implementing a ‘mortgage rescue’ by a local housing association, or bringing closed mortgage books within the regulatory perimeter. You can read the report here.
You can find out more about the FCA’s changes to mortgage lending rules for mortgage prisoners here.
Does that mean I have to wait until I'm contacted by my lender before I can look for a new deal?
No, it’s worth exploring the options that might be available to you as soon as possible. A spokesman for financial website Moneyfacts.co.uk said: “Mortgage prisoners do not have to wait until they receive a letter from their lender to look for a new deal. As Covid-19 restrictions are being relaxed, the housing market is starting to move again, and mortgage lenders are beginning to reintroduce deals.”
West Bromwich Building Society, for example, last year launched two mortgages which should be accessible to ‘mortgage prisoners’ who are struggling to move to another mortgage elsewhere. Find out more about how these mortgages work and whether you could be eligible here.
Alternatively, if you’re not sure where to begin, it can be a good idea to speak to a fee free mortgage broker.
Gemma Harle, managing director of Quilter Financial Planning said: “Each case is unique so your situation will be very different to someone else’s. Speak to a mortgage adviser as they will be able to provide you with information on the market and guide you through next steps. They will have knowledge of the lenders willing to apply the modified affordability assessment.
“The Money Advice Service has produced a handy list of regulated mortgage advisers in your area who have all said they are willing to work with mortgage prisoners and can offer support in moving you to a better deal, or provide additional support such as debt advice.”
What if I have an interest-only mortgage?
Many mortgage prisoners are trapped on interest-only mortgages, which as the name suggests, mean that they only repay the interest they owe each month rather than any of the capital – which must be repaid at the end of the mortgage term. However, at the time many mortgage prisoners took out their interest-only mortgages they did not have to show clear evidence of how they were going to repay the capital. Tighter lending rules now mean that this evidence is now required which has left thousands of interest-only borrowers unable to remortgage.
Under the FCA’s latest rules however, lenders are allowed to adopt more “proportionate” checks that should allow interest-only customers to switch to a new deal, although this doesn’t seem to have been mildly adopted by lenders, resulting in many people still finding it impossible to remortgage.
Interest-only mortgage customers also have the option of retirement interest-only mortgages. These are designed specifically for older borrowers and rather than lasting for a specific term, they run indefinitely until the property is sold, or the homeowner dies or moves into long-term care.
Borrowers do still have to make monthly interest-only payments, so they will need to demonstrate that their income will cover these costs, but will not necessarily have to demonstrate how they will repay the capital at the end of the term. Lenders offering interest-only mortgages are often building societies and include Leeds Building Society, Nottingham Building Society, Nationwide Building Society and Bath Building Society. There’s no minimum age requirement for interest-only mortgages, but they are typically aimed at older homeowners in their 50s or 60s who are likely to find them easier to qualify for than a standard interest-only mortgage.
Learn more about how retirement interest-only mortgages work in our article How retirement interest-only mortgages work.
There are a number of fee free RIO mortgage brokers available in the market, but if you are looking for somewhere to start, we’ve partnered with Tembo Money. They can provide you with a free consultation and research the various options on your behalf to help you decide whether a RIO mortgage might be right for you.
Does being over 50 make it harder for me to remortgage?
Your age shouldn’t be another barrier to you remortgaging to a cheaper deal, however lenders are still obliged to look at the affordability of the mortgage, both before, and after you are set to retire. The age at which most lenders start to restrict lending based on age has been pushed back quite significantly in recent years with many lenders extending the maximum age they will consider at the end of the mortgage term. Depending on your financial circumstances and projected retirement income however, you may still find it more difficult if you want to extend the mortgage term into retirement as under the new affordability rules, you will need to demonstrate how you will afford the repayments, even after a drop in income after you retire. Find out more in our article Mortgages if you’re over 50: what you need to know.
What if I’m unable to remortgage and can’t afford to pay my mortgage?
If you’re struggling to cover your mortgage payments, get in touch with your lender as soon as possible and let them know you’re having problems. They may be able to defer your payments for a short period of time, or extend your mortgage term to help reduce the cost of your payments. Bear in mind, however, that any support they offer you will go on your credit report, and may affect your ability to borrow in future.
Support for mortgage prisoners
The UK Mortgage Prisoners group is a support group for those trapped in their current deals, and can be found here. It has launched a legal action to try to reclaim the difference between the high rates mortgage prisoners have been charged and a fair rate. Read more about this here.
Are you a mortgage prisoner who’s finding it impossible to remortgage, or have you managed to switch to a different deal? If so, we’d be interested in hearing from you. You can join the conversation on the Rest Less Community Forum or leave a comment below.