Mortgage Prisoners: What Are They & The Challenges They Face

For mortgage holders, having the option to choose the most affordable product for your circumstances is important. As situations change during life from being first-time buyers to retired homeowners, the requirements of your mortgage product may need to adjust also. There are mortgage holders who have been in the same product terms for many years when in fact they could benefit from changing their mortgage to take advantage of better rates of interest and more flexible terms. However, the reality for some is that this process isn’t straightforward, or they are ‘stuck’ in the mortgage product they currently have.

The term ‘Mortgage Prisoner’ refers to this, with the Financial Conduct Authority (FCA) reporting in March 2019 there are an estimated 140,000 borrowers who were unable to switch to a better deal, even when they were up to date with their repayments.The FCA Mortgage Market Study set out a vision for the mortgage market to be one that allows borrowers who can afford a mortgage the option to choose suitable and good value products and services, and for firms to have a culture of treating all consumers fairly whilst having healthy competition and proportionate regulation.The idea is to allow consumers to make more informed choices not only at the start of their mortgage but throughout it.

The Challenges

Since the study was carried out in early 2019,the FCA changed the rules in October last year for how lenders help consumers re-mortgage with no additional borrowing either with the same lender or a different one.This was so any ‘mortgage prisoners’ would be able to get in contact with their mortgage lender and look at the options available to them. It also allowed lenders to assess a customer’s affordability based on their track record of making mortgage repayments. They set up an Industry Implementation Group to help lenders adjust to the new modified assessments as well.Since the rule changes, it was reported in December 2019 that specialist litigation firm Harcus Parker had begun legal proceedings on behalf of as many as 200,000 ‘mortgage prisoners’ citing lenders had “failed to treat borrowers fairly.”

Many “mortgage prisoners” are borrowers who started their mortgage before the financial crisis in 2008. Due to stricter lending rules in the aftermath of this, mortgage holders who were former Northern Rock or Bradford and Bingley customers, for example, have been blocked from switching. Now with the rule changes, the idea is that these customers can start to change their product if they have the affordability. One of the biggest challenges recently, however, has been the ongoing global health crisis.

The current landscape has been affected by COVID-19 since the rule changes came into place, with mortgage lenders having to make unprecedented adjustments.Some lenders have removed many of their mortgage products since the start of March and have provided 1.6 million repayment holidays to customers. The lack of new switching options due to COVID-19 has meant that the FCA has also extended the period to which they expect lenders to contact customers in writing who are eligible to switch products by 3 months to 1 December 2020. The FCA has said this is because they “do not want mortgage prisoners to receive communications encouraging them to switch when there are no suitable products available for them.” 

How Are Mortgage Prisoners Affected?

In November 2019, there were 18,470 new remortgages with no additional borrowing. This was after the new rule changes brought in by the FCA, however, this figure was 12.4% fewer than in November 2018.Whilst the rule changes have been very positive, not all “mortgage prisoners” are yet to benefit from it. With the 2020 financial crisis, it has unexpectedly put a temporary halt on the mortgage sector, meaning many will have to wait longer to potentially switch their mortgage product. The UK Mortgage Prisoner Support Service was set up to help those who have been impacted by the many years of being stuck in their mortgage. Many have interest-only mortgages and have ended up paying much more than they originally owed, with some of these firms not regulated by the FCA. One of their key findings was that around 250,000 people are in closed mortgage books or have mortgages owned by firms who are not FCA regulated.These firms do not always follow mortgage lending regulations and charge differently as they are ‘inactive lenders’.

Many of the mortgages that were affected by the financial crisis in 2008 were held by the Treasury for 6 years after Northern Rock and Bradford & Bingley collapsed. The interest being charged was approximately 5% APR although other deals were available for around 2%, according to the Independent. Much of this debt was then sold by the Treasury to Cerberus Capital Management in 2015 for $13 billion. This meant anyone who had one of these mortgages now was not paying to a mortgage lender, but instead to a firm not FCA regulated. The term ‘inactive’ or ‘unregulated lenders’ in relation to mortgages may refer to firms who do not lend money to customers but instead buy debts to then generate profit for investors. In June last year, Charlie Elphicke MP and Martin Whitfield MP who are Co-Chairs of the All-Party Parliamentary Group on Fair Business Banking (APPG) called for the banning of selling debt to unregulated and inactive lenders.

Speaking to their bank or mortgage lender considering the FCA changes should now lead to positive changes for many “Mortgage Prisoners”. Although the market is effectively on hold until at least the coronavirus pandemic is under control, the foundations are now there for those who have been stuck on the same mortgage product to finally find a better deal. The FCA has written an open letter to lenders at the beginning of May asking them to help those customers who took out mortgages before the financial crisis and review the interest rates charged as a “matter of urgency”. They will be undertaking a follow-up in the coming weeks and will “take action where they believe customers are still not being treated fairly”.

Here at Wizzcash, we are dedicated to treating customers fairly and we are also an FCA regulated lender. For more insight and information on lending regulations in the high cost short term loan market, please see the below articles: