The term ‘mortgage prisoners’ seems strange, but, it exists. It is used widely in the British lending industry and the borrowers’ community. The mortgage prisoner is a borrower trapped with a current mortgage and unable to switch the agreement to a new borrower. According to a report by BBC, more than 150,000 homeowners are in the state of mortgage prisoners after being stuck in high interest-rate secured loans provided for diverse needs.
The facts, responsible for having so many mortgage prisoners in the UK, have already been highlighted.
The global financial crisis during 2008 is still being held responsible for creating such a high number of mortgage prisoners in the UK. During 1996 to 2008, there was a real estate boom. Anyone could borrow four times of salary with a deposit of just 10%. In the early 2000s, 100% LTV mortgages with no deposit were introduced; during this period, banks were ready to lend even up to eight times of self-certified earning. By 2006, the average house price went up to £160,000 but the average income could rise only to £20,400. By the arrival of 2008, the UK also started feeling the heat of the global financial crisis.
To manage the challenges of the global financial crisis, the UK’s financial regulator ordered to review mortgage lending norms and banks started to follow the stricter lending process. When borrowers with heavy mortgage loan tried for new mortgage agreement, the lenders refused because the borrowers couldn’t fulfill the new lending qualification. Thus, the mortgage prisoners were left helpless with only option to keep the current mortgage debt at lender’s SVR, which was higher than that being offered by the direct mortgage leading market.
The good news is that the Financial Conduct Authority recently proposed loosening the affordability checks for ‘mortgage prisoners’.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA revealed, “The British mortgage market is working well for high level in- trade competition and customer engagement. Our new package will benefit the mortgage loan borrowers to find the better mortgage.”
What is new in FCA’s package announced on26th March 2019 for mortgage prisoners? The remedies package mortgage borrowers include:
A. Speeding the processes by lenders to help the borrowers identify the best mortgage for them
B. Establishment of Single Financial Guidance Body (SFGB) to help the mortgage borrowers make the better-informed choice for the lender
C. Consulting the proposals to alter the mortgage advice rules for innovative and borrowers’ centric lending
D. Understanding the customers who don’t switch mortgage
Sarah Nield, the financial services risk & regulation director at consultancy PwC, says, “The FCA’s proposals are a significant step in the right direction. The new rules will provide the lenders more freedom to let the ‘mortgage prisoners’ opt for better deals. New regulations are expected to safeguard the future interests of mortgage customers”.
The intervention of FCA to rescue mortgage prisoners was being expected since a long. More and more homeowners are feeling like a mortgage prisoner. If someone borrows money through mortgage or remortgage in financially satisfactory conditions but the circumstances change fast just after borrowing, the same borrower can’t pass recommended affordability check for remortgage; as a result, the borrower remains trapped with the same lender. It is more painful when a borrower comes across the low-interest rate mortgage loan deals but continues to pay at the standard variable rate.
For example, if Peterson owes £400,000 mortgaged loan and still has 20 years to go with the same mortgage and he is stuck on lender’s SVR at 4%; them the monthly repayment installment would be £2,400. It is almost £500 per month more than it would be in case of a fixed-rate mortgage loan.
The issue became more highlighted when the UK government sold NRAM mortgages to an inactive lender Citi that created hundreds of more mortgage prisoners without any clue but to suffer further. The numbers of mortgage prisoners met with Nicky Morgan, chairman of Treasury select committee who set up an all-party parliamentary group on April 26, 2019, to resolve the issue last week.
Rachel Neale, one in the group mortgage prisoners, says, “The meeting was promising. We demanded a public inquiry to probe why our loans were sold to inactive lenders; and, how the FCA and Govt. will help the mortgage prisoners.”
During the meeting, mortgage prisoners also raised the issue of being pressurized by the inactive lenders to be stuck with their costlier lending policies. The APPG is expected to take concrete actions after getting other MPs’ support.
Ms. Neale describes it as a ‘waiting game’ also adding that the issue is urgent. She says, “We are waiting for justice for over the years. They should order to inactive lenders to go at ease releasing any pressure over the mortgage borrowers, who are already suffering from financial, mental health, relationship problems.”
To keep the fire on, the UK Mortgage Prisoners’ spokespeople will meet Andrew Bailey, the chief executive of the FCA very soon.
It is confirmed that the much-awaited changes in mortgage lending would help only to those mortgage prisoners who don’t want to borrow more on the mortgaged property but just want to reduce the repayment cost. Banks, building societies and financial institutions would also need to agree with new regulations.
Supporting the widely hailed development, Citizens Advice chief executive Gillian Guy says, “The FCA needs to find out why the mortgage loan borrowers paying high rates were not switching mortgage lenders. FCA is expected to act promptly as the loyal mortgage customers are being penalized about £1.4m every day.” All the mortgage prisoners expect a concrete action taken by the FCA by the end of 2019 to help the mortgage prisoners come out of debt by repaying less at a new interest rate with the freedom to choose the lender.