In previous issues this year we looked at remortgaging basics – what to watch out for, how to be sure you have got the best deal, when is the best time to switch. This time Vanya Damyanova investigates more complex cases, falling under the category of the so-called “mortgage misfits” or “mortgage prisoners”
With more than eight million mortgage holders in the UK, remortgaging is a huge chunk of the business. And given that customers do not remortgage just when their contract expires but switch between deals and often between lenders for various reasons, the market is always brewing.
In recent years getting a new loan has become more complicated than just choosing an offer that suits you. The financial crisis changed the landscape and now more borrowers than before may face considerable challenges when trying to find a new arrangement.
The ripple effect of a base rate rise
The rock-bottom interest rates are a particular cause for concern, many experts say. Keeping the base rate at the record-low level of 0.5 per cent since 2009 has been a way for the Bank of England to provide some breathing space for the volatile financial markets and support economic growth. Even though the Bank has said it is in no hurry to raise the base rate, the market expects it to go up in the middle of 2016.
Falling through the cracks
In the wake of the financial crisis lenders were faced with new, tighter legislation for advancing loans. The Mortgage Market Review (MMR) launched in April 2014 requires lenders to do thorough checks before advancing a loan. The increased pressure on lenders affected customers. In many cases, people who had received mortgages under the old requirements were no longer deemed eligible for a mortgage after the MMR. The Financial Conduct Authority (FCA) had taken into account that some borrowers may fall through the cracks as a result of the new legislation and included the so-called Transitional Arrangements Clause in the MMR especially for such cases.
Those borrowers are dubbed “mortgage misfits” or “mortgage prisoners”. In most cases these are self-employed, self-builders and older customers, whose mortgage term will run past their retirement.
According to estimates from the Resolution Foundation around 770,000 households in the UK fall into two potentially problematic categories of mortgage borrowers:
- Those already at risk of being “mortgage prisoners” because of their limited ability to switch to better deals in order to insulate themselves against future rate rises.
- Those facing the likelihood of becoming “highly-geared” – with their monthly mortgage repayments eating up at least one-third of their disposable income by 2018 as interest rates rise.
The Foundation’s research shows that a third group, falling into both categories at the same time, is the most vulnerable.
What options do mortgage misfits have?
Currently, not many lenders are taking on “transitional” cases and the choices are limited for borrowers stuck in their current mortgage deal. The Melton and Ipswich building societies are among the few providing options for mortgage prisoners.
What Mortgage magazine asked both lenders about their experiences so far.
Ipswich
The Ipswich Building Society launched a range of services for “mortgage misfits” in February this year. Speaking to What Mortgage, the society’s chief executive Paul Winter said older borrowers were the most likely to fall through the cracks and the options for them were extremely limited.
The society shared its experiences with problematic mortgage cases so far as well as some tips for borrowers that may face difficulty to remortgage. Ipswich also told us about a couple of its more mature customers who were able to successfully remortgage.
Q Is the society’s experience with “mortgage misfit”-applicants so far positive or negative?
So far extremely positive, in the main we are receiving applications from mortgage misfits who are creditworthy but need a bit more time, thought and common sense to understand their situation and find a way to help them. In many cases for borrowers over the age of 50 they often approach us wanting to use transitional as their lender has declined them on affordability due to age. However, as our policy allows us to lend up to the age of 85 at the end of the mortgage term we can often use the standard affordability route and don’t even need transitional arrangements to provide them with a mortgage.
It seems that for some lenders assessing affordability for someone in or approaching retirement is either too complicated or deemed just not worth the effort. There are also concerns for joint mortgage applications regarding the affordability following the death of the lead income earner.
Whilst it does take more effort and thought to consider the range of sources of income available to the older borrower, these sources are viable under affordability rules and the risk of the partner with greater earning power losing this remains with younger borrowers. In reality, we believe these objections to meeting the needs of older borrowers are not wholly founded. We believe their exclusion in this manner is unfair and often unreasonable and we have been delighted to see the Financial Ombudsman agree on their recent ruling on this subject.
We haven’t said ‘yes’ to everyone, in a few instances it has not been affordable for the borrower to continue with their mortgage. In those situations we urge the borrowers to obtain financial advice to form a plan that best suits their situation and needs.
Q Why did Ipswich decide to accept applications from “mortgage misfits”? Is that part of a strategy to correct a loophole in the market?
The FCA very wisely introduced transitional arrangements as part of MMR to protect those creditworthy borrowers who did not meet the new affordability rules. With the introduction of such a large scale change to the mortgage market, it was inevitable that some borrowers would unintentionally find themselves trapped. Transitional arrangements are there to protect these borrowers and help ensure they do not remain trapped on lenders’ often higher standard variable rates.
We are simply using these existing rules as they were intended and would hope more lenders would do the same. This is also why we are against the removal of open market transitional rules due to come in under new European rules in March 2016. Its removal will disadvantage many borrowers and reduce their choice of mortgage products from across the market.
Q What are your recommendations to borrowers “stuck” in their mortgage?
Here are some general tips to get you started:
- First of all check with your lender if you meet the new affordability rules, they should be able to do this without conducting a credit check.
- Ask your lender if they are using transitional arrangements and the criteria for these.
- To increase your choice in mortgages search for lenders who will apply transitional rules to all borrowers (not just their own).
- If you’re an older borrower (sadly that can be anyone over the age of 40!) then ask lenders what their maximum lending age is.
- Look for a lender that uses something called manual underwriting. This means the lender uses human beings rather than an automated system to make their lending decisions.
If you think you may need to use transitional arrangements please check that:
- You have held a mortgage prior to 26 April 2014 when MMR came into force.
- You have always made your mortgage repayments on time.
- Your overall credit situation is healthy.
- You must not be looking to increase your mortgage.
- Your circumstances have not changed to a point where your new mortgage is unaffordable.
Even with a change in circumstances it is still possible to use transitional arrangements as long as this is in the best interests of the borrower, for example, by reducing their monthly payment and where evidence of income to pay the mortgage remains reasonable.
The Melton
The Melton Building Society announced in February this year that it is also reviewing “transitional” cases and is making all existing products available to borrowers classified as mortgage prisoners.
“We believe it is our responsibility to give existing borrowers who have a good payment record and no change of circumstances a choice of competitive mortgage products,” Martin Reason, chief executive of The Melton, said.
Speaking to What Mortgage recently Reason said some of the cases The Melton had to deal with so far involved former self-certified mortgage holders. Self-certified mortgages were contracts introduced to help buyers who had money for a deposit but did not have to provide proof of their real income, often because they were either self-employed or working as a contractor. Self-cert mortgages were banned by the FCA a few years ago.
Like Ipswich,The Melton has also had a positive experience with mortgage misfits so far. Mostly these were self-employed business people with a sound credit record, who had been regular with their repayments but after the MMR no longer qualified for a new deal. Looking for a way out of the high-interest rate contracts they were stuck on, they turned to the building society.
The individual approach in such cases is key, because there are specifics to each case that do not meet the standard affordability requirements.
Since its first announcement The Melton has expanded the range of services it provides for “transitional” cases twice.
In March, the society expanded its transitional arrangements service to include brokers. This was made in response to high demand.
In May, the society said it will start reviewing cases of customers on interest-only mortgages. Interest-only mortgages require monthly repayments only of the interest while at the end of the term the borrower still owes the entire amount of the loan.
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CASE STUDY: Jenny and Jack find the right mortgage and an understanding attitude at the Ipswich
When Jenny Ryan was turned down for a remortgage despite her excellent credit history, we (Ipswich Building Society)stepped in to help.
Interest-only mortgages used to be common, but in recent years they’ve practically disappeared. However, many people have fixed-rate, interest-only deals that they chose before the financial crisis of 2007, and which are now coming to an end.
Most lenders will advise borrowers in this position to switch to a repayment mortgage, with a higher monthly cost. But if this new cost fails the ‘affordability test’ that came in with the recent Mortgage Market Review, they could be turned down – leaving them without a mortgage.
Jenny Ryan is a self-employed swimming instructor. Her partner Jack Mitchell is a retired teacher who works part-time as a cleaner. Jenny had an interest-only mortgage for £125,000, in her name only, on the house she shared with Jack. She didn’t have a way to pay off the mortgage when it ended, but she’d overpaid for many years to reduce the balance – often by £200–£300 a month.
In 2015, when Jenny was 58 and Jack 64, they approached her existing lender to apply for a joint repayment mortgage of £124,320. At that time, Jenny’s property was worth £199,000.
Disappointingly, the lender only offered Jenny £85,000. Despite her regular overpayments and an impeccable credit history, her sole income wasn’t enough to make the full amount affordable, the lender said. And even though Jack had a decent pension and worked part-time, he was turned down too, since he was so near the lender’s age limit.
“I’ve always been careful with money,” says Jenny. “I checked my credit record and it’s excellent, and I don’t have any credit cards.”
Jenny turned to other lenders, but it was the same story. She would either have to sell her home, or use her savings to make up the difference. But she really didn’t want to sell up, and had hoped to use her savings to adapt her elderly mum’s house for home care.
With just seven months left on her interest-only mortgage, the future of Jenny’s home was hanging in the balance. She was suffering many sleepless nights. But then she came to the Ipswich.
Our manual underwriting procedures meant we could look sensibly at Jenny’s circumstances and credit history, as well as her future pension income. When we did, it was clear that she could afford a repayment mortgage – and would still be able to even when she retired.
By using transitional arrangements we could offer her a repayment mortgage over 16 years, with a fixed rate for five years. That meant the payments were the same as the overpayments she’d been making previously. Since our maximum age is 85, we were able to take Jack’s income into account and add him to the mortgage too.
Our positive stance on ‘mortgage misfits’ isn’t common, and it’s making a few waves in the industry.
“We’re standing up for those who are often overlooked by lenders who insist on machine-only application processes,” says Paul Winter, our chief executive. “It’s possible to take a diligent approach to lending, but still give people a choice.”
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Expert Opinion
Looking for an independent opinion we spoke with entrepreneur and property developer Michelle Niziol, who is founder and managing director of Independent Mortgage Solutions. She confirmed the challenges older borrowers are facing and explained why it is best for mortgage misfits to turn to a smaller building society rather than a larger bank.
What options do borrowers falling under the Transitional Arrangements Clause have when they want to remortgage?
“Regular lenders you will find on the high street just haven’t got the appetite for this sort of business so we are having to reach further afield to the smaller building societies who offer a more human approach to lending, for example interest only mortgages or lending past the age of 70”.
Not many lenders are offering loans to this type of borrower from another lender. What risks do you think they see in lending to transitional cases?
“These cases take so much time from an underwriting perspective that mainstream lenders just cannot facilitate these types of cases, a lot of the high street banks have a set criteria so do not underwrite really on individual cases. The Mortgage Market review last year put a lot of pressure on lenders lending responsibly and therefore a lot of clients are stuck with interest only mortgages”.
What would you recommend to consumers when they want to remortgage and change their lender?
“We always contact their existing lender first to see what deals they can offer their existing client to stay with them and then compare the deal with the whole of the market”.
Do you believe the MMR has had benefits for consumers?
“I believe that longer term MMR will ensure a more stable housing economy so indirectly yes”.
Do you think it is more challenging for older borrowers to get a mortgage now?
“Yes absolutely, however, we work with smaller building societies where this is still their niche market so we still get these mortgages through”.
What are the main issues more mature people have to tackle when looking to remortgage?
“MMR introduced lending responsibly with affordability, one of the main priorities now means that lenders will take the length of term of the mortgage into consideration and that has an effect on how much they will lend to a client, so length of term is a real problem.”
What would you recommend to consumers regarding their age when taking out a loan?
“Affordability, just to ensure its affordable going forward into retirement.”
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