Are you locked into your current mortgage, paying far higher rates than you need to but unable to switch to a new deal? Is this due to your lender’s stricter criteria since you originally took out your loan or because the loan was sold to an inactive lender? If this is the situation you’ve found yourself in, then it’s highly likely that you’re a mortgage prisoner.
As you may already know, the Financial Conduct Authority (FCA) reviewed the situation with mortgage prisoners in the UK and intervened by introducing relaxed affordability checks to be carried out by lenders. These modified affordability assessment rules aim to enable homeowners who’ve been trapped for years in deals with expensive interest rates to be able to switch to better deals elsewhere.
At Trinity Finance, we can review your situation based on the revised criteria to determine whether you can break free from this position. If your payments are up to date with no additional borrowing and you wish to remortgage, give us a call on 01322 907 000 as we may be able to switch you to a cheaper deal, saving you hundreds – if not thousands – of pounds.
What is a mortgage prisoner?
You are classed as a mortgage prisoner if you’re locked into your current mortgage deal when you could potentially get a cheaper deal elsewhere. This affects you if you took out a mortgage before the 2008 financial crisis but are now blocked from switching due to your lender’s stricter criteria or because your loan was sold to an inactive lender.
You may, for example, be unable to switch to a better deal from your current mortgage due to the strict affordability criteria that were applied after the financial crash in 2008. Whilst strict controls were necessary to prevent a similar situation from occurring in the future, you’ve become trapped in your existing mortgage deal without the possibility of remortgaging. This is despite your payments being up to date and the fact that you’d likely be paying a lot less than you are now with a new deal.
Alternatively, your existing mortgage may now be with an inactive or unregulated lender. An inactive lender cannot offer new mortgages, leaving you stuck where you are without the option to remortgage to a more competitive deal. An unregulated lender may not only be unlicensed and, therefore, unable to provide mortgage deals but can charge you whatever they like without any repercussions.
Whichever scenario you’re in, you are likely paying much higher fees and more for your mortgage overall than you would if you were able to switch to a more competitive new deal with an active lender. This can especially be an issue if you’re paying your lender’s standard variable rate (SVR), which is usually much higher than other rates, or you have a large mortgage loan outstanding.
How have borrowers become mortgage prisoners?
Before the financial crisis in 2008, lenders had much more relaxed lending criteria. Mortgages with 100% loan-to-value (LTV) ratios were commonplace, lenders calculated the affordability on up to eight times a person’s salary and those who were self-employed could verify their income with self-certification. Property prices rose rapidly and people borrowed considerable amounts, whether buying a new property or releasing equity from their homes.
As a result of the 2008 financial crisis, lenders had to re-evaluate their lending rules and provide more transparency regarding the risks of having a mortgage. Affordability checks were tightened and mortgage products became less flexible in accordance with new rules introduced in 2014. Higher deposits were required, higher rates and fees were charged, the income calculation became much stricter and mortgage terms were restricted.
When property owners tried to remortgage to a better deal, particularly when the interest rates became lower, they were faced with much stricter affordability criteria than when they took out their initial loans. Even though cheaper mortgage deals were available, they couldn’t pass the new affordability checks and their applications to remortgage were rejected. Borrowers who’d taken out mortgages with a high LTV on an interest-only basis had very little equity in their properties to use as collateral. Many property owners found themselves in negative equity when the prices dropped. Those with fixed interest rates for their mortgages were forced to switch to their lenders’ much higher SVRs when the fixed term ended.
Many lenders stopped offering mortgages altogether, becoming inactive. This meant new mortgages couldn’t be offered to their customers so remortgaging with them wasn’t a possibility. The borrowers were also unable to remortgage via new lenders as the affordability criteria were too strict. This meant they were trapped paying their lenders’ high rates without any alternative options being available. Some lenders collapsed and their mortgage books were sold to third-party companies by UK Asset Regulation (UKAR). Unfortunately, some of these companies were unauthorised and unregulated.
If you bought a property or chose to remortgage before the stricter affordability rules were introduced in 2014 and have been unable to switch to a more competitive deal since then, it’s likely that you’re a mortgage prisoner. This is particularly the case if you originally took out a mortgage with either Northern Rock or Bradford & Bingley. You are by no means alone in this situation as the FCA estimated that approximately 250,000 mortgage prisoners existed in the UK in 2019, a figure which reduced to 195,000 when they reviewed the situation again at the end of 2021.
What type of mortgage prisoner are you?
There are different ways you may have become a mortgage prisoner and we’ve referred to them above. Here are the scenarios that can help you identify if you’re a mortgage prisoner.
You cannot pass the affordability checks
When you took out the mortgage, you could comfortability afford it and met the relaxed lending criteria presented at the time. Since then, your circumstances may have changed and the stricter affordability criteria mean you cannot switch to a new deal, either with your current lender or a new one. For example, you may have been made redundant, have a low credit rating, have split up with the person you bought the property with or have suffered from an accident or illness that has impeded your employment status. If you’re self-employed, you can no longer self-certify your income under the revised criteria.
A typical issue is that you may originally have signed up for a fixed interest rate with the hope of switching to a better deal before the end of that fixed term. Or you may have wished to take advantage of the interest rates when they fell to historic lows by switching to a more competitive deal. However, as your personal circumstances had changed and you were unable to meet the stricter affordability rules, you were rejected for a remortgage and reverted to the lender’s higher SVR instead — a rate that you’re still paying now. This affordability scenario has resulted in a common dichotomy among mortgage prisoners — you’re paying a high monthly amount now but can’t secure a new deal to pay a considerably lower amount as the affordability checks imply that you can’t afford it.
Your mortgage was sold to a third party
When lenders got into difficulties as a result of the 2008 financial crisis, such as Northern Rock and Bradford & Bingley, they either stopped offering new mortgages or their mortgage books were sold to third parties who often didn’t hold lending licences. If you had a mortgage via one of these lenders that was subsequently sold on to a third party, you may be being held over a barrel by them. As they are unauthorised and unregulated, they can conduct business as they wish. As they’re unlicensed, they may not have the facility to offer any alternative loans. They can also charge what they wish so you may have been paying extortionate interest rates. A repercussion of this is that you may not have been able to afford the high payments, causing you to subsequently fall into arrears with your mortgage. This, in turn, has prevented you from being able to switch to a deal with a new lender.
You have negative equity
Before the 2008 financial crisis, property prices were high and big mortgage loans were easy to obtain. Afterwards, however, the prices dropped drastically, pushing many borrowers into negative equity as they owed more on their mortgages than their properties were worth. Lenders are usually reluctant to let borrowers switch to a new deal if they’re in this position. Therefore, if you have an outstanding mortgage that’s higher than the value of your property, you’re likely to have become a mortgage prisoner due to negative equity.
You took an interest-only deal
Interest-only deals can be a popular choice as the monthly payments are cheaper than those for repayment mortgages. As you only pay the interest on the loan each month, the downside is that none of the actual mortgage loan (the capital) is repaid. It must be repaid, however, in full at the end of the mortgage term. Nowadays, to benefit from an interest-only mortgage, you have to provide the lender with proof of how you intend to repay the loan, such as having a savings plan. Before the financial crisis in 2008, however, interest-only deals were much easier to secure, with large loans often being provided due to the high property prices and no requirement for a repayment plan by lenders.
Now, as borrowers have approached retirement age and realised they have no way to repay the capital by the end of the mortgage term, they’ve tried to remortgage but without success. One reason for this is that lenders set an age limit when granting mortgage loans for when the mortgage term must end. The nearer you are to this age, the less time you have to repay the loan. This will result in much higher repayments and the lender will have to carry out affordability checks to ensure you can make them. When you’re near to retirement age or already receiving your pension, these high payments are going to make the affordability checks hard to pass.
You may have left the decision to remortgage late because you had planned to sell your home to repay the loan and use the remaining funds to downsize. However, as property prices have risen so much recently, they’ve pushed a smaller property out of your reach. You’re now left in the situation where you cannot repay the loan but also cannot remortgage or afford to downsize.
If you believe you’re a mortgage prisoner and would like help with trying to switch to a better deal, get in touch with us on 01322 907 000. Our mortgage advisers, located throughout Kent, London and Edinburgh, can check your current situation as well as your eligibility to remortgage under the new rules. Alternatively, send your details to us by email at firstname.lastname@example.org or via our contact form and we will reply to you as quickly as possible.
The increase in mortgage prisoners
Although the financial crisis in 2008 created a huge wave of mortgage prisoners, which was then exacerbated by the new lending rules introduced in 2014, you can still become a mortgage prisoner under some circumstances. For example, if you’ve had to take a reduction in pay or lost your job altogether – both of which have affected many borrowers during the coronavirus pandemic – you may be unable to remortgage. If you’re stuck with a deal on a variable rate, you’ll have no choice but to keep making higher payments each time the rate increases, making your financial situation worse. Likewise, if your fixed rate deal came to an end and you were rejected for a remortgage, you’ll now have to pay the higher SVR set by your lender, adding to your financial issues.
Can you escape your situation as a mortgage prisoner?
There are ways you can improve your circumstances to help break free from this situation, which we’ve detailed below. As well as taking steps yourself, modified affordability assessment rules have been introduced by the FCA that may finally enable you to switch to a better deal.
Steps you can take to help yourself
- Make overpayments. If you have savings tucked away or receive bonus payments from work, use this money to overpay your mortgage. This reduces your overall debt faster than by simply making monthly repayments and helps to increase the equity in your property. Lenders may look favourably on you in the future if they can see you’ve been able to make overpayments. Just check with your lender first that your mortgage has the facility to make overpayments and confirm the amount you can overpay without being penalised.
- Reduce other debts. If you’re able to reduce or even clear some debts other than your mortgage, this will help when it comes to a lender’s affordability calculations.
- Keep outgoings to a minimum. As well as reducing your debts, try to keep other expenditure as low as possible. For example, if you have a gym membership but rarely use it, just cancel it. Research the energy tariffs and consider switching to a new gas or electricity supplier for cheaper bills.
- Improve your credit rating. There are various ways to increase your credit score, which can help when approaching a lender for a remortgage. For example, check your credit report to ensure the information is accurate and that there are no financial links to others with bad credit. Control your spending, such as by closing your home shopping accounts and cancelling unnecessary subscriptions. Also, ensure that your normal bills are always paid on time.
Intervention by the FCA
Towards the end of 2019, modified mortgage assessment criteria were introduced by the FCA. These provided lenders with the means to carry out more relaxed affordability assessments for mortgage prisoners. The FCA also stipulated that inactive lenders and unregulated companies had to advise their customers of these changes.
As a mortgage prisoner wishing to remortgage, all of your payments must be up to date to qualify and you mustn’t require any additional borrowing. Whilst the FCA has asked lenders to provide mortgage prisoners with access to better deals, it’s up to each lender whether or not they wish to implement this assessment method. Our mortgage advisers work closely with lenders who have adopted the modified mortgage assessment criteria to help mortgage prisoners switch to new deals. Give us a call on 01322 907 000 and we’ll check your eligibility to remortgage under the new rules.
What are the modified affordability assessment rules?
Under these rules, lenders can choose to waive some of the normal affordability checks. This means they’re not required to assess your income and expenditure and don’t have to check that you can afford your mortgage repayments should the interest rate rise in the future. They can offer you a new mortgage on this basis provided that it will be more affordable than your current deal. As mentioned above, however, these rules aren’t mandatory.
Eligibility criteria under the new rules
For those lenders who choose to use the modified affordability rules, they typically expect you to meet the following criteria:
- Have at least 5 years left on your mortgage term
- Have an outstanding mortgage balance of at least £50,000
- Be up to date with your mortgage payments
- Not have any missed payments in the last 12 months
- Have no further borrowing requirements
- Adhere to their maximum LTV requirement, such as 75%
- Need the remortgage for your current home as a more affordable option
Some lenders will ask for a copy of the letter you received from your existing lender advising you of the new rules that may help you as a mortgage prisoner.
Whilst not all lenders will be prepared to offer remortgages based on these relaxed affordability rules, others may have more flexible approaches if you can show your affordability of a new mortgage with them. For example, they may be prepared to offer you a partial conversion to a repayment mortgage if you currently have an interest-only mortgage. If you’re an older borrower, they may consider offering you a retirement interest-only mortgage.
Get in touch for help with your situation as a mortgage prisoner
At Trinity Finance, we can assess your situation and determine whether you’re eligible to apply for a remortgage under the modified affordability assessment rules. Our mortgage brokers – located throughout Kent, London and Edinburgh – work in close cooperation with lenders who are prepared to help mortgage prisoners using these revised affordability criteria. They also work closely with specialist lenders who may be able to offer bespoke solutions to your situation. Your dedicated mortgage consultant will tailor your application and present it to the right lender for the strongest chance of success.
To get started with the process, just give us a call on 01322 907 000 and we’ll do our best to help you switch to a new deal. If you prefer, email your details to us at email@example.com or send them to us via our contact form. We’ll reply to you as quickly as possible and endeavour to save you a considerable amount on your mortgage by switching you to a cheaper deal.