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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