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Are Mortgage Prisoners Finally Due to Be Released?

Are Mortgage Prisoners Finally Due to Be Released?

by | Aug 6, 2021 | Mortgage News

The saga of mortgage prisoners has been rumbling along since 2014 (when the recommendations of the Mortgage Market Review were implemented). Understandably, it has rather taken a backseat to both COVID19 and Brexit. It now appears to be back on the agenda with the industry, the FCA and the houses of parliament.

News from the mortgage front

Back in April, the plight of mortgage prisoners was highlighted, again, due to a brief skirmish between the government and the house of Lords. When the Financial Services Bill was presented to the Lords, they backed an amendment calling on the government to cap the Standard Variable Rate (SVR) lenders could charge mortgage prisoners.

This amendment was, however, rejected by parliament, leaving mortgage prisoners stuck with the status quo. In July, however, both the Treasury and the FCA made public statements indicating that the matter was still very much in their sights. In fact, the FCA is due to submit a review to parliament in November.

What will the review contain?

Obviously, the exact contents of the review will only become public when it is complete. It is, however, safe to assume that it will include an estimate of the size of the problem. The FCA previously estimated that there were around a quarter of a million mortgage prisoners (in July 2020). It now acknowledges that the number may be greater.

The FCA has also indicated that it will look at the effectiveness of the steps already taken to release mortgage prisoners. Presumably, this will provide some level of insight as to what is and is not working at the moment. It may therefore inform any changes the government may choose to make.

What changes could the government make?

Realistically, the government only has two options. The first is to change the affordability criteria, at least for mortgage prisoners. The other is to take steps to make it easier for mortgage prisoners to satisfy standard affordability criteria. Both options raise clear questions and potential issues.

The first option raises the question of who will be responsible if a former mortgage prisoner defaults on a mortgage they would never have given under current rules. If this risk is placed on the lender, then lenders might choose to play it safe and decline the application. This would therefore effectively send mortgage prisoners right back to square one.

The government could get around this by offering some kind of guarantee to lenders. There is certainly precedent for them doing so. The government already offers support to first-time buyers and certain other buyer groups. They could extend this to mortgage prisoners.

The issue here is that subsidising one group of buyers effectively gives them an advantage over other groups of buyers. This does not necessarily go down well with those other buyers, especially not if they are paying for the subsidy through their taxes.

What options are likely?

The government has to deal with the financial consequences of COVID19 and Brexit along with wider issues such as social care and major projects such as HS2. It, therefore, seems safe to assume that it will wish to avoid taking on any more financial commitments than it can help.

This would suggest that the path forward may be to restructure affordability rules albeit with heavy caveats. For example, the government may allow lenders to relax affordability rules if a borrower is already making repayments of the same amount or more. Obviously, the borrower would need to demonstrate a consistent track record of making those repayments.

Another option might be to insist that borrowers have some form of insurance to cover their repayments at least for a certain period. This requirement could potentially be waived for borrowers who have a minimum level of equity in their homes.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

 

Are you a mortgage prisoner?

Are you a mortgage prisoner?

by | Jan 30, 2020 | Mortgage News

The fact that mortgage lenders are now expected to apply fairly stringent “affordability criteria” to borrowers is probably, overall, a positive.  It is, however, not necessarily a benefit to everyone.  The media has been quick to pick up on the situation of “mortgage prisoners”, sadly lenders and the FCA seem to have been rather slow to respond, although they do appear to be getting there (at long last).

What is a mortgage prisoner?

A mortgage prisoner is essentially someone who is unable to remortgage.  It is often used to refer to people who cannot switch to cheaper deals because they are now considered to be unable to afford them even though they are currently paying more on their mortgage.

It may also be used to refer to people who have had a change in circumstances which does not necessarily impact their ability to pay but does cause them to fall outside standard lending policy, for example, people who’ve recently become self-employed.

The issue of people on interest-only mortgages is a more nuanced one as they would be likely to need to switch from a cheaper deal (i.e. only paying the interest) to a more expensive one, which might quite reasonably raise questions about affordability.  While acknowledging that the end effect is the same, the route there is definitely somewhat different.

How to break out of financial jail

Regardless of your situation, your first port of call should ideally be a professional mortgage broker.  If the issue is simply that you are a “round peg in a square hole” then they may be able to bypass computer algorithms and get your application in front of an actual human who can apply human judgement and common sense.  Alternatively, they may be able to point you towards lenders who can apply a bit of flexibility.

For example, if you are currently on an interest-only mortgage and you want to switch to a repayment mortgage knowing that you cannot afford it over the long term (e.g. after retirement), but simply wanting to build up equity in the property and to have control over when, exactly, you sell it to downsize, then a mortgage broker may be able to assist in finding a lender who can work with that.

Another option (depending on your age) might be to extend the term of an interest-only mortgage to the point where you can use equity release to pay off the principal.  Depending on the type of equity release you choose, you might then be able to pay off some or all of the principal (and/or interest) and/or downsize, so you avoid dying with debts on your estate.  Having said that, if you get a “no negative equity guarantee” then the extent of your estate’s liability will be limited to the value of your home after your death so that may not be a huge issue for you.

How to make yourself more attractive to mortgage lenders

A mortgage broker can help you to make the most of what you have, and the more you give them to work with, the easier it will be for them to help you.  There are three key factors which determine how attractive you look to a mortgage lender.  The first is your credit score and the second is your loan to value ratio, which can also influence affordability (the more you can pay upfront, the less you have to find in monthly repayments) and, of course, affordability.

There is lots of advice online about improving your credit score.  In the context of remortgaging, improving your loan to value ratio basically means either paying down your mortgage to reduce the amount you need to borrow on a new mortgage or increasing the value of your home.  If you have any spare cash, it may be worth looking into the latter approach to see if it increases your options.

Your property may be repossessed if you do not keep up repayments on your mortgage.

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