Are you paying far higher rates for your mortgage than you need to but are unable to switch to a new deal? Is this because you cannot pass the strict lending criteria that have been introduced since you took out the loan, even though you’d be paying far less with a new deal? Or was your loan sold to an inactive lender who has been unable to offer you a new mortgage, leaving you trapped in your existing deal without the chance to remortgage? If you’re stuck with your current mortgage when cheaper deals are available elsewhere, you’re more than likely a mortgage prisoner.
After the situation with mortgage prisoners was reviewed by the Financial Conduct Authority (FCA), modified affordability checks were introduced. These enabled lenders to offer new deals to homeowners who have been trapped in this position. If you’re a mortgage prisoner – or know someone else who is – read on to find out more about the revised criteria and how you may be able to save hundreds, if not thousands, of pounds should you be able to switch to a cheaper deal.
What is a mortgage prisoner?
The surge of mortgage prisoners occurred after the 2008 financial crisis. If you took out a mortgage before then and are still locked into your current mortgage deal despite being able to benefit from a cheaper deal elsewhere, you’re classed as a mortgage prisoner.
Strict affordability criteria were introduced after the financial crisis and these may have prevented you from switching to a new deal. Even if your payments have been kept up to date and a new deal means paying a lot less than you are now, without passing the strict criteria, you’re trapped in your existing mortgage deal and unable to remortgage.
Another reason you may be a mortgage prisoner is if your loan was sold to an inactive lender. Inactive lenders cannot provide new mortgages, leaving you without the opportunity to remortgage to a better deal. Mortgage loans were also sold to unregulated lenders after the financial crisis. As well as being unable to offer new mortgage deals, these lenders can charge whatever they wish to without facing any repercussions.
No matter which of these scenarios you’ve found yourself in, you are more than likely paying a much higher rate than you need to. This, in turn, will increase the overall cost of your mortgage. The rate you’re paying can be especially problematic if you have a large outstanding mortgage loan for your property in Bexleyheath or you’re paying your lender’s standard variable rate (SVR), which tends to be higher than other rates.
How did the financial crisis lead to mortgage prisoners?
Before the financial crisis, the lending criteria that had to be met were much more relaxed. A higher multiplier was used to calculate the affordability for a borrower and 100% loan-to-value mortgages were easy to obtain. As well as that, self-employed borrowers could use self-certification to verify their income. The prices of properties increased quickly and large amounts were borrowed.
After the financial crisis of 2008, however, the lending rules had to be re-evaluated. New rules were introduced in 2014 that resulted in tighter affordability checks and less flexible mortgage products. The income calculation became stricter, the deposit requirement was increased, higher rates and fees were charged and mortgage terms were restricted.
As the affordability criteria were so much stricter than when borrowers first took out their loans, they found themselves unable to remortgage to a better deal. Their applications were rejected because they couldn’t pass the affordability checks, despite the new mortgage deals being cheaper. Borrowers who had initially taken out a fixed rate mortgage deal had to switch to the lender’s more expensive SVR when the term ended. As well as that, many property owners went into negative equity when the property prices came down.
Many lenders became inactive, meaning that they stopped offering mortgages. Their customers were, therefore, unable to remortgage to a new deal and so became trapped in their existing one. Other lenders collapsed and their mortgage books were sold to third-party companies. As mentioned above, some of them were unlicensed and unauthorised.
Can you break free from this situation?
If you have become a mortgage prisoner, you’re not alone. In 2019, the FCA estimated that there were approximately 250,000 mortgage prisoners in the UK. When the situation was reviewed again at the end of 2021, this figure had reduced to 195,000. The FCA’s modified affordability criteria may finally allow you to switch to a new deal. There are also steps you can take to improve your circumstances so that you can break free from this situation.
Improve your circumstances
- Increase your credit rating. The higher your credit score, the more favourably a lender will look at your case. Check that your credit report is accurate and ensure any financial links to others with bad credit have been removed. Also, be sure to pay your normal bills on time.
- Keep your outgoings to a minimum. Try to control your expenditure as much as possible. For example, close your home shopping accounts and cancel unnecessary memberships or subscriptions.
- Make overpayments on your mortgage. If you have a way to overpay your mortgage, such as with savings or a bonus payment from work, this is a good way to reduce your overall debt. Check with your lender first that making an overpayment is possible and that you won’t be penalised.
- Reduce your debts. As well as trying to reduce the size of your mortgage loan for your Pimlico property, try to reduce any other debts you may have as this will help with the affordability checks.
The modified affordability criteria
The modified rules allow lenders to use more relaxed affordability criteria for mortgage prisoners. With these rules, lenders can waive some of the standard affordability checks if they wish to. For example, they don’t need to assess your income and expenditure. They also don’t need to check that you can afford your monthly repayments in the event of interest rate increases. The FCA has encouraged lenders to use this assessment method to enable as many mortgage prisoners as possible to switch to a better deal but it’s not a mandatory requirement. Inactive and unregulated lenders must notify their customers of the new criteria.
Are you eligible under the new rules?
Generally, you’ll need to meet these criteria via lenders choosing to use the modified assessment rules:
- Have a minimum of 5 years remaining on your mortgage term
- Have at least £50,000 outstanding on your mortgage balance
- Be up to date with your mortgage payments
- Have no missed payments within the last 12 months
- Have no further borrowing requirements
- Meet their maximum LTV requirement, such as 75%
- Need the remortgage as a less expensive option for your existing home
Seek help from a mortgage expert
At Trinity Finance, we can check your eligibility for a remortgage via lenders using the modified affordability criteria. Our mortgage brokers, who are located throughout Kent, London and Edinburgh, can then search for cheaper mortgage deals for you, helping you to break free from your situation as a mortgage prisoner and allowing you to benefit from considerable savings.
Just give us a call on 01322 907 000 to discuss your circumstances and find out what options are available to you. Alternatively, send your details to us by email at firstname.lastname@example.org and one of our mortgage specialists will reply to you as quickly as possible.