Help for mortgage prisoners may finally be on the way, says FCA

Almost 150,000 mortgage prisoners unable to switch from costly deals may soon be offered a lifeline by the financial watchdog.

The Financial Conduct Authority today launched a consultation on whether it should change its own rules to make it easier for banks and building societies to lend to those stuck on legacy deals with high interest rates.

This could potentially benefit thousands of homeowners in the UK, dubbed mortgage prisoners because they are unable to switch to cheaper deals as a result of stricter lending rules brought in after the financial crisis. 

Some could be paying mortgage rates that are more than double those achievable with new deals, costing them hundreds of pounds more a month.

Mortgage prisoners have become trapped with lenders that no longer do business, while and others are borrowers who fall outside of the FCA’s control.

The problem has emerged because before the financial crisis, it was much easier to get a mortgage and many people took one out that they would not 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.

Around 20,000 homeowners are stuck with lenders that are no longer active – with a further 120,000 stuck with firms that aren’t regulated by the FCA.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.

Now, the FCA is proposing changes to its lending rules to help remove barriers to homeowners being offered a more affordable mortgage. 

It claims its proposals will make it easier for customers of inactive lenders and unregulated entities to switch to an active, authorised lender. The consultation will close on 26 June.  

In January, the FCA said it would take ‘immediate action’ to help mortgage prisoners, after Treasury Select Committee chair Nicky Morgan MP called for more action to be taken.

At the time, FCA chief executive Andrew Bailey said in a letter to Morgan: ‘We want to remove potential barriers in our rules to these customers switching to a cheaper mortgage. 

‘To help these customers, we will consult on the changes to our responsible lending rules, with the aim to deliver a more proportionate affordability assessment.

‘We intend to move the assessment from an absolute test to a relative test, thus the test would be whether the new mortgage costs are more affordable than the current mortgage costs. 

‘Our focus will be on those customers who are seeking to move to a cheaper mortgage and are not borrowing more.’

In simple terms, this means if a customer has been keeping up with repayments they should be able to switch to a cheaper rate regardless of whether they meet the FCA’s tightened affordability criteria. 

In its consultation paper today, the FCA also added that any revised affordability assessment won’t just be available to consumers on a lender’s reversion rate, or standard variable rate.  

The watchdog first discussed widening its remit to help borrowers in May last year

What have lenders done to help mortgage prisoners?

In August last year, 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 signed up to the scheme has since grown, with banks Aldermore and TSB both signing up 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 by now have wrote to any qualifying borrowers to inform them of their options.