Mortgages are supposed to provide customers with the means to buy properties they want, but they can end up becoming a trap.
‘Mortgage prisoners’ is a term used to describe people who cannot afford to switch from the mortgage they have.
In response, the FCA is proposing new rules to control how mortgage providers evaluate prospective customers, to enable mortgage prisoners to break free from their current lenders and secure better deals elsewhere.
However, what measures can mortgage professionals take now to support customers who are already mortgage prisoners?
What is a Mortgage Prisoner?
A significant figure in the FCA’s Mortgage Market Study is that an estimated 140,000 borrowers are unable to switch to a better mortgage deal.
This is despite the fact they are up to date with their payments.
These borrowers are ‘mortgage prisoners’, and are often customers of inactive lenders.
These inactive lenders are companies who own and collect mortgage debt, but do not, or are unable to, provide new mortgages, or change the terms of existing arrangements.
Many of these types of mortgage are legacies of the 2008 financial crash, where lenders who went under sold their loan books on to other companies.
It is often the case that mortgage prisoners will end up having to pay a standard variable rate on their mortgage once their fixed-rate period ends.
This leaves them in the difficult situation of being trapped in a mortgage deal which they must keep paying off, however unaffordable that seems.
The FCA estimates that around 250,000 people are in closed mortgage books, or have mortgages that are not FCA-regulated.
However, a significant proportion of these are up to date with their payments.
This would make them eligible for switching mortgages, under the new rules the FCA has brought in for mortgage lenders.
This change to responsible lending rules, allows the lender to assess the affordability of a mortgage based on the borrower’s mortgage payment track record.
What Actions will Free Mortgage Prisoners?
LSE research into mortgage prisoners recommends that the Treasury should act to free them from the situations they are trapped in.
This help could be in the form of various loans.
For example, many mortgage prisoners have interest-only mortgages, so they are not paying off the debt balance of their loans.
This means they have not built up equity in their homes.
One recommendation from LSE is that the Government looks at ways to deal with Together loans.
This type of loan combines a high LTV mortgage with an unsecured loan.
But, typically, the unsecured loan’s rates will shoot up if the borrower tries to switch lenders.
LSE also suggests that the Government provides incentives to lenders to write-off parts of mortgage prisoners’ loans, and then apply Government equity loans to help reduce subsequent monthly payments and allow for remortgaging.
There should also be a cap on standard variable rates (SVRs) on closed book loans.
LSE also recommends extending the FCA’s regulatory powers to cover unregulated lenders.
This would mean requiring the authorisation of all loan book lenders, which would then mean the FCA could enforce regulations that help mortgage prisoners.
How is the FCA Helping?
The FCA has set up an Industry Implementation Group to help lenders implement the new, modified affordability assessment rules.
This group aims to engage with a broad range of mortgage providers and to encourage publicising the availability of new switching offers.
One way that the FCA aims to help mortgage prisoners is through the use of mortgage intermediaries.
The FCA has issued a call for these intermediaries to help.
They could work with mortgage prisoners to help them identify active lenders who they could move to.
This raising of awareness on the part of mortgage prisoners is an important aspect of helping to release them from the deals they are trapped in.
Intermediaries who wish to help with this must have applied to be on the FCA’s approved list by August 2020.
To be featured on the list, intermediaries must have been able to:
- Advise on later life and debt consolidation, or offer relevant routes for these options.
- Advise on later life and debt consolidation, or offer relevant routes for these options.
They must also:
- Not charge a fee until the mortgage prisoner submits an application to a lender; and
- Collect and share relevant information with the FCA.
The data that intermediaries provide to the FCA will help with the monitoring of outcomes for mortgage prisoners.
How Can Lenders Help Mortgage Prisoners?
The FCA wants as many lenders as possible to offer the modified affordability assessment to mortgage prisoners.
This depends on how the lender’s whole decision-making process works, including what characteristics will make borrowers more or less attractive as prospects.
These characteristics include:
- The borrower’s age
- The loan-to-value ratio
- The remaining length of the term of the mortgage
- The remaining balance.
These factors all influence the credit risk of borrowers.
But it is important that in each case the lender does consider the borrower’s payment track record.
Lenders should be making it easier for borrowers to choose the right mortgage for them, providing constructive advice and feedback on eligibility and affordability.
It is also crucial that lenders make it easier for borrowers to switch mortgage deals.
Ultimately, the better things are for borrowers, the better business will be for mortgage providers across the board.
Compliance is Key
The mortgage prisoner issue is another example of the FCA updating its rules, ultimately to help consumers.
For mortgage providers, it is vital that they keep up to date with compliance, and adopt best practice measures that will help them compete effectively, while also helping their customers.For more information about how we can support you, please get in touch today.
