A review by the financial regulator, the FCA, has once again highlighted the plight of the thousands of borrowers who are stuck on deals with rates as high as 4.5% or more and cannot remortgage to a cheaper option.
It has called on lenders to loosen their rules for mortgage prisoners as part of a raft of recommendations which is being sent to the government.
And it has also recommended these borrowers seek support from debt charities to improve their credit rating and pay down interest-only mortgages to improve their chances of moving to a better deal.
But for the many mortgage prisoners who have fallen into severe financial difficulty, many of whom are classified as ‘vulnerable’ as result of this trap, this may come as little comfort.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said achieving both a better credit rating and the ability to pay down more of their mortgage would be ‘far easier if they were able to get a cheaper deal in the interim’.
She added: “Prisoners are trapped in a vicious circle. They’re often paying a far higher interest rate than everyone else, and while the average rate of 4.3% is bad enough, 3% of them are paying over 5%.
“It means they’re completely focused on making ends meet, so tackling their underlying problems becomes a Herculean task.
“If every penny is going on your existing mortgage, it’s harder to pay down a big outstanding interest-only balance.
“Likewise, if it absorbs a major chunk of your income, you run the risk of missing payments. And both of these things make you more likely to remain a prisoner for even longer.”
Sarah was also concerned their problems would worsen as the borrowers become older. “Almost twice as many people with inactive lenders are over the age of 56 (35.3%), and almost four times as many are aged 76 or over (2.1%),” she said.
“Having big outstanding balances at a later age makes the task of finding an alternative to switch to even harder.”
Mortgage prisoners – who is affected?
The FCA’s review focused on the people who are stuck on deals with ‘inactive lenders’. These are lenders which stopped lending and therefore closed their mortgage books following the tightening of rules which were put in place following the credit crunch.
It said many of these borrowers had been issued mortgages despite the fact they were on lower incomes or had credit problems.
And this is how they become trapped – because their current lender was no long offering mortgages to which they could switch. What’s more, moving to another lender was not an option because the new rules under which providers had become bound meant these borrowers would not qualify for new deals.
In fact, the FCA, said the total number of people whose mortgages are in ‘closed books’ was actually as many as 195,000. Of these, the regulator said, 47,000 were classed as mortgage prisoners because they would benefit from switching but are completely unable to do so.
The remaining number included some who only had £10,000 left to pay off, which was not enough to be able to take out a mortgage and those who may not benefit from switching.
There were also 66,000 who were able to switch but have not.
What can be done?
In the review the regulator has made a number of recommendations including calling on lenders to adapt their rules, or make them more flexible, for mortgage prisoners.
It also suggested the borrowers themselves received help from charities and debt organisations to support them to improve their credit rating and pay down interest-only mortgages.
But with so much uncertainty – high inflation and a potential rise in interest rates – some were sceptical as to whether this would be plausible for lenders.
Gemma Harle, managing director of Quilter Financial Planning, said: “The FCA rightly highlights in the review that the rules it has put in place to help this group can only be effective if lenders are willing to apply the new assessment and offer a product for mortgage prisoners to allow them to switch.
“In the current economic environment, lenders are understandably cautious but that largely leaves the problem unsolved, with mortgage prisoners left in limbo.”
