A top boss from the UK’s financial watchdog has repeated calls to be given more powers to help mortgage prisoners – six months after it originally said it would ask the Government for help.
Tens of thousands of mortgage holders in the UK are dubbed mortgage prisoners, so-called because they are unable to switch to cheaper deals – despite being up-to-date with monthly payments – as a result of stricter lending rules brought in after the financial crisis.
Speaking at an industry event last week, the Financial Conduct Authority’s Christopher Woolard said it may seek more powers from Government to help those affected – a promise the watchdog already made in an interim report in May.
Tens of thousands cannot switch to a cheaper rate despite being up to date with payments
The problem has emerged because some mortgage prisoners are with lenders that no longer do business and others are borrowers who fall outside of the FCA’s control.
Before the financial crisis , it was much easier to get a mortgage and many people took one out that they would not manage to be approved for today.
This is because in 2014 stricter lending rules were introduced, so that homeowners didn’t risk overstretching themselves.
But the tougher criteria meant that some existing homeowners would no longer pass the eligibility tests of their existing lenders.
Despite lenders being instructed to help them, those in the position often find that when their deals came to an end they remortgage to another and are simply rolled over on to a standard variable rate, which tends to be much more expensive.
Around 20,000 of these are stuck with lenders that are no longer active – with a further 120,000 stuck with firms that aren’t regulated by the FCA.
This means there are around 140,000 mortgage holders in the UK who can’t switch to a cheaper rate despite keeping up with monthly payments, and there is no regulatory body in the country with the powers to help them.
Financial Conduct Authority’s Chris Woolard
‘It simply isn’t an acceptable argument to hide behind the intricacies of our regulatory perimeter when real families are involved,’ Woolard said.
But this isn’t the first time the regulator has said it will ask government for more powers to help mortgage prisoners.
In May, in its interim report for its Mortgages Market Study, the FCA said: ‘Where firms sit outside the FCA’s regulatory remit and offer no new products to new or existing customers the solution is more challenging.
‘The FCA’s regulatory remit is a matter for Parliament.
‘We will begin discussions on possible solutions for inactive lenders with relevant firms, consumer groups and Government.’
When approached by This is Money, Woolard would not comment on how far these discussions have progressed since May, but said an update would come in the new year.
Mortgage providers have agreed to help the 10,000 mortgage prisoners with active lenders
‘We want to find a way to help customers who are simply unable to switch their mortgage, even though they would benefit from doing so,’ he said. ‘This is a complex issue and requires a creative solution.
‘That is why, since May, we’ve been working with an industry group to assess what the fundamental issues are and what barriers remain.
‘These discussions are vital in informing our view on what changes may need to be made, either by us or others, and we expect to provide an update in spring.’
Citizens Advice: It’s not just mortgage prisoners needing help
Citizens Advice chief executive Gillian Guy
Gillian Guy, chief executive of Citizens Advice, said: ‘Mortgage prisoners need to be released from their shackles so it’s good to see action on this from the FCA.
‘But beyond this, there’s a much larger group paying a loyalty penalty for staying with their existing mortgage provider and they need protection too.
‘The FCA needs to work with mortgage providers and come up with concrete measures to stop customers from being ripped off.’
What have lenders done to help mortgage prisoners?
Back in August, trade body UK Finance confirmed that 59 lenders representing 93 per cent of the UK’s residential mortgage market had agreed a list of common standards to help the estimated 10,000 borrowers who are with still-active lenders.
The number of lenders has since risen, with banks Aldermore and TSB both signing up to the scheme following its launch.
To qualify, customers need to be existing borrowers of an active lender, be up to date with payments, have a minimum remaining term of two years, and have a minimum outstanding loan amount of £10,000.
At the watchdog’s request, lenders will write to any qualifying borrowers by the end of the year to inform them of their options.
Customers do not need to take any action and are not obliged to switch if they don’t want to.
Meet the mortgage prisoners – the human cost behind the FCA’s numbers
As Woolard pointed out, thousand of real families are still being impacted by the hangover from the financial crash.
Earlier this year we revealed how new parents Anne and Carl Winter were unable to move home, despite it lowering mortgage payments.
Their new home would be cheaper than their existing one, meaning they could cut down on their monthly outgoings by around £550.
By reducing their mortgage to £145,000 from £165,000, the Winters would save around £200 a month. In addition, their current home had increased in value from the £169,000 they paid in 2014 to around £195,000.
Moving would free up equity to pay off their credit card debts, saving them another £350 a month.
Initially, a Santander adviser said they could move their mortgage. They were told there would be a small early repayment charge to break their five-year fixed term early – 5 per cent of the £9,000 difference between their old and new loans.
But a few weeks later Santander rejected their application. The bank said the couple had failed affordability checks introduced in 2014 by the City watchdog.
The Winters would have to pay a £7,700 penalty to repay their five-year fixed rate mortgage early if they moved and found another lender.
Anne and Carl Winter were told they couldn’t afford to switch even though it would be cheaper
The young parents were stuck in the situation of being told they could not afford to switch deals, even though they would end up paying less each month than they already were.
The only alternative — staying put — meant struggling along with higher repayments.
At the time, a Santander spokesman said the Winters’ finances have changed ‘significantly’ since they took out the mortgage.
He added: ‘We will always look to ensure that our lending will not lead to problems with debt. We believe the new property is outside the Winters’ future affordability.
‘We would be happy to review this case again to try to support them in finding an affordable solution.
‘In this particular circumstance we would be happy to look at waiving the early redemption penalty if the customer decided to move to another provider.’
Since August mortgage prisoners with active lenders, like the Winters, are being offered the opportunity to switch to a cheaper rate.
For the 140,000 still on inactive or unauthorised lenders however, they will have to wait until Spring for any announcements on whether the Government will grant the FCA the powers to help them.