You’ve paid your mortgage, with no issues, for the last five years. You now want to move to a cheaper mortgage but you’re told by your lender you cant afford it! Sounds silly no?
Just recently we have met with a number of individuals who would be described as mortgage prisoners. Due to their current income multipliers and strict lending criteria they are unable to move their mortgage to another lender. The number of so called mortgage prisoners has been growing steadily since the financial crisis of 2008 and has become such a problem that the Financial Conduct Authority recently announced plans to consult on revised lending rules designed to assist those imprisoned by their current mortgage.
What is a Mortgage Prisoner and How Did They Become One?
Mortgage Prisoners are effectively locked into their high interest standard variable rate mortgages, unable to meet the lending criteria for the more attractive and affordable mortgages now available.
In the 10 years prior to the financial crisis of 2008, the UK experienced an unprecedented property price boom. Mortgage lenders were prepared to lend large amounts and accept small amounts as deposits. 100% loan to value products became common place and the self employed could easily self certify. Lenders were offering up to 8 times salary; where historically the ratio had been 4 times salary. Unsurprisingly people made the most of the easy money and borrowed heavily to get on to the property ladder or grow their existing property portfolios. Que the crash of 2008 and the subsequent review of lending criteria!
So, as circumstances changed, mortgage providers reviewed their lending criteria and a number of borrowers, particular those with larger mortgages, found that they did not now pass the revised affordability checks on a new mortgage, effectively becoming trapped in their existing mortgage, unable to switch to a new, more affordable mortgage. The borrower will have inevitably reverted from the initial low interest promotional offer interest rate to the lender’s high interest standard variable rate (SVR). With the Bank of England cutting the base interest rate to 0.5%, some very attractive mortgage products were appearing, which a mortgage prisoner was unable to take advantage of.
Mortgage Prisoners – A Growing Problem
Mortgage prisoners are a growing problem, yet the financial crash was over 10 years ago now, so there are obviously other factors at play that are trapping people into their mortgages. Negative equity is an additional source of mortgage prisoners. According to the BBC, over 150,000 homeowners are currently trapped in their mortgage.
What you are able to borrow is based on some simple criteria, primarily a ratio of your earnings against the value of your property. Lenders will look closely at a number of factors when determining whether or not to lend:
- Value of the property
- Your Salary
- Your Debts
- Equity in the property
- Lending cap ratio
Any variation in any of the above may result in an individual being viewed as too risky to lend to; thus becoming a mortgage prisoner.
Martin Lewis, founder of MoneySavingExpert.com does a great job of distilling the problem:
“Affordability checks are important for first-time buyers. But for those that are remortgaging to a cheaper deal – without moving house, without borrowing more and without a change of circumstance – to be told that they cannot afford a cheaper deal is nonsense, and it means the tests are flawed.”
A Change of Rules
The Financial Conduct Authority has proposed a change of rules, with the aim to deliver a more proportionate affordability assessment. For customers stuck on high interest-rate mortgages with unregulated or inactive firms, affordability checks will be loosened, allowing those stuck to apply for a more affordable mortgage. The rules would only apply to those not looking to increase their mortgage. Of the 150,000 customers stuck with their high interest mortgage, it is thought that 120,000 are with non-regulated firms, including previous Bradford & Bingley and Northern Rock customers.
In a bid to reduce the number of mortgage prisoners in the UK, a group of 59 authorised lenders, accounting for 93% of the UK residential mortgage market have agreed to help borrowers who are up to date with repayments switch to new products. Proactive efforts will be made to offer customers more affordable products, though customers do not have to switch. In order to qualify, borrowers must have a minimum of 2 years remaining on their existing mortgage term and an outstanding balance of at least £10,000. They must also be:
- Existing borrowers with an active lender
- First time buyers (owner-occupiers)
- On a reversion rate such as a Standard Variable Rate.
- Up-to-date with payments
- Looking for a like-for-like mortgage (not looking to increase borrowing)
- Able to benefit from switching
Talk to a Mortgage Adviser
If you’re stuck in your mortgage, and your mortgage lender hasn’t already contacted you, consider talking to a mortgage adviser. An example of how we have helped a client in this situation:
The client was paying over £3,000 a month on their interest only mortgage with a high street Bank on a standard variable rate (SVR) of over 5%. They had been instructed by the lender that they could not switch their mortgage product due to their income ratio versus the amount of mortgage, i.e they failed the affordability test even though they had kept up with their high payments! In this particular case we advised on how best to approach the lender. The client subsequently successfully switched to a competitive 2 year fixed rate that was half of what they were paying on the standard variable rate, saving the client and his family over £1,200 per month.