Is relief on the way for mortgage prisoners?
Around 140,000 people in the UK are trapped in expensive mortgage deals, unable to switch to a better rate thanks to a frustrating quirk of regulations.
These homeowners, dubbed mortgage prisoners, have fallen onto their lenders’ standard variable rate, which is usually the highest interest rate mortgage offered, and is the default rate for those whose fixed-rate deals have ended.
While some homeowners may slip onto this high rate temporarily, because they failed to secure a new, cheaper mortgage deal in time or forgot to do so, mortgage prisoners are trapped on these rates and unable to switch away.
This is because these individuals took out their mortgage before the financial crisis and before new regulations came into place, which place additional affordability checks on individuals applying for a mortgage.
These homeowners end up in the perverse situation where they are told they cannot afford to move to a cheaper deal, even though it would cost them less per month than the current high rates they are paying.
WHAT IS A STANDARD VARIABLE RATE?
Standard variable rate mortgage rates move in line with changes in the Bank of England base rate, meaning these homeowners have seen their interest, and so their monthly mortgage repayments, ratchet up as the Bank has increased interest rates.
They are the default rate for mortgage providers and are far more costly than the best rates that same lender will offer. As an example of how bad value these rates are, from our research of a sample of the biggest mortgage lenders the average homeowner on their lender’s standard variable rate is paying £3,500 a year extra in interest (based on a £200,000 25-year loan).
For example, HSBC’s current standard variable rate is 4.19%, compared to its two-year fixed rate on an 80% loan-to-value of 1.64%. On a £200,000 loan that works out as £3,245 more each year. The worst offender is Leeds Building Society, with homeowners offered 1.62% as the best two-year fix for a £200,000 mortgage on an 80% loan-to-value, which jumps to 5.69% when they get pushed onto the standard variable rate – costing almost £5,400 a year more.
WHY ARE SOME PEOPLE TRAPPED ON THESE RATES?
New regulations introduced after the crisis, known as the Mortgage Market Review, mean that customers face stricter affordability tests. The rules were intended to stop lending to people who ultimately couldn’t afford it.
However, it means that anyone who took out a mortgage before the regulations will face tougher tests when they come to remortgage, meaning they could find they don’t pass and so are not approved. They are then stuck in limbo – they can continue on their current, poor value, deal but are unable to switch elsewhere.
This is also true if they just want to switch to a better rate with their current provider, as well as if they want to switch provider.
The Bank of England estimates there are 140,000 mortgage prisoners. 10,000 of those are with mortgage lenders who are still operating in the market, while 20,000 are with firms that are classed as “inactive” so are no longer issuing new loans.
The bulk of the group, at 120,000, are with firms whose book of mortgages have been sold on to non-mortgage lenders, for example people with a mortgage with Northern Rock whose mortgages were sold on to investors.
The City regulator, the Financial Conduct Authority, has already made progress with the first group, the 10,000 who are still with active mortgage lenders, and those who are not in default and not looking to borrow more should now find it easier to switch to a better rate.
The latter two groups are a harder problem to solve, as their lender doesn’t offer new mortgages anymore. However, the regulator said this month that it plans to loosen the affordability criteria to allow these homeowners to switch to a better deal.
It proposed moving from an ‘absolute’ to a ‘relative’ test of affordability – put simply, if the new mortgage costs less each month than the existing one, it’s likely the customer can afford it.
Again, this will only apply to those homeowners who are not trying to borrow more. Homeowners who are in arrears, have very high borrowing relative to the value of the property, have large debts or are in negative equity will be unlikely to benefit.