FCA to review UK mortgage prisoner numbers as it admits ‘low estimate’

The finance watchdog has admitted that the number of ‘mortgage prisoners’ across the UK may exceed previous estimates.

Mortgage prisoners are borrowers who took out high-interest home loans with lenders such as Northern Rock, which collapsed during the 2008 financial crash.

Trapped in a catch-22 situation thanks to mortgage lenders’ rules (see factbox below), they have been paying eye-watering interest rates of up to 9 per cent, in some cases for more than a decade.

Trapped: Mortgage prisoners took out high-interest loans pre-financial crisis and find it difficult to remortgage due to stricter affordability criteria, debt and negative equity

The Financial Conduct Authority has previously said that there are 250,000 mortgage prisoners, but the review will interrogate that figure.

In the terms of reference the FCA has set out, it said: ‘We believe that our July 2020 assumptions led to a low estimate of the number of customers who have mortgages with inactive firms and are unable to switch despite being up to date with payments.

‘We expect that the change in economic conditions, more recent data and updated assumptions are likely to lead to an increase in our estimated number of mortgage prisoners.’

The review was announced by Economic Secretary to the Treasury, John Glen, in April 2021.

It happened as he led the opposition to a House of Lords amendment to the Financial Services Bill, which proposed capping the standard variable interest rates that mortgage prisoners could be charged, therefore reducing their monthly bills.

The amendment was not passed, as 355 Conservative MPs voted against it.

Rachel Neale, who founded the UK Mortgage Prisoners Action Group, said borrowers were frustrated that the FCA review was only happening now, after the old figures were used in the debate over the potentially life-changing amendment.

What is a mortgage prisoner? 

Mortgage prisoners took out high-interest home loans before the financial crisis, with lenders that subsequently collapsed. The most high-profile example is Northern Rock. 

Their mortgages were then put into a Government holding company, which sold the loans on to investment funds, for example Cerberus.

Their loans are currently held under brands such as Heliodor, Landmark and NRAM. 

These companies do not offer new mortgages, so remortgaging with them is not possible. 

Other lenders will rarely accept mortgage prisoners because they adjusted their affordability requirements post-financial crisis and they now do not qualify. Some have also fallen into arrears due to their high payments.

This leaves them trapped on default ‘standard variable’ interest rates as high as 9 per cent, meaning they have paid tens of thousands more than mainstream mortgage customers at a time when wider interest rates have fallen to rock-bottom levels.  

As a result, they say they have suffered financial hardship, but also emotional distress including mental health problems and family breakdowns.

‘There are so many people who have contacted us and said the SVR cap decision just crushed us,’ she said.

‘Now [The FCA] is admitting that all of the figures that they have produced in the past have been produced on assumptions.

‘Everything [The FCA and John Glen] have done has misled the whole situation, it has misled the way people have voted for solutions that have been put through and it has completely damaged mortgage prisoners.’

Neale believes the true number of mortgage prisoners resulting from the financial crash could be closer to 300,000.

She also said that a new cohort of mortgage prisoners was being created due to the cladding scandal, which is making homes unsaleable and impossible to remortgage in some cases. 

This is in addition to the pandemic, which has seen people on furlough and who have taken government support grants for the self-employed be turned down for remortgages and fall on to higher standard variable rates.

Neale said these cases should also be taken into account in the review.

‘Everything has been created by the Government and the banking industry. They are the only two that can resolve all those issues because they are the ones that created the problem,’ she added.

Neale is also concerned that FCA’s intention to ‘update [the] data to consider the demographic and loan characteristics of mortgage prisoners’ could result in some mortgage prisoners, for example those who have fallen into arrears as a result of high interest rates, being unfairly stigmatised.

‘The huge worry with this review, which is why we never wanted it to be done, is that they want to create a narrative that victimises and plays a blame game,’ she said.

The UKMPAG will meet with the FCA next month to discuss the review.

The cap proposed by the Lords amendment would have been no more than 2 percentage points above the Bank of England’s base rate, which would currently make it 2.1 per cent, and the UKMPAG said it could have saved some of its members £800 a month.

Sky high: Some mortgage prisoners pay interest of up to 9 per cent (picture posed by model)

Sky high: Some mortgage prisoners pay interest of up to 9 per cent (picture posed by model)

Speaking in the Commons, Glen cited Financial Conduct Authority analysis which, he said, showed that half of mortgage prisoners would be eligible to switch mortgages if they chose to.

He also said the SVR cap would be ‘deeply unfair’ to borrowers in the mainstream mortgage market who were in arrears or unable to secure a new fixed-rate deal, as they would not be able to benefit from the same interest rate reduction.

Glen promised that the Treasury would work with the FCA on a new solution for mortgage prisoners, of which the review is part.

The review will also report on the effectiveness of the ‘modified affordability assessment,’ a Government intervention which was supposed to make it easier for mortgage prisoners to remortgage with active lenders.

The policy has been in place since October 2019, and means lenders can choose not to ask for evidence of a customer’s income and expenses, or apply a stress test.

However, this is not compulsory on the part of the lender, and the UK MPAG says many mortgage prisoners are not able to benefit.

The Treasury has promised to work with lenders and regulators to find 'practical and proportionate' solutions to the high interest rates paid by mortgage prisoners

The Treasury has promised to work with lenders and regulators to find ‘practical and proportionate’ solutions to the high interest rates paid by mortgage prisoners

In April, it said that it was only aware of 40 borrowers that had benefited from this.

The FCA review will be laid before parliament by the end of November this year.

In a statement, the Treasury has said that after the review is published it will work with lenders and regulators to ‘Look for practical and proportionate solutions to help as many affected borrowers as possible switch to an active lender, should this be the customer’s wish.’

This, it said, could include taking advantage of the modified affordability assessment, ‘offering additional flexibility around other aspects of the underwriting process’, or taking other steps to reduce the barriers that prevent borrowers from switching to a better deal.

Separately, The UKMPAG is now launching the Home Ownership Protection Enterprise, a mediation service which aims to provide an ‘end-to-end open communication channel between mortgage providers, local authorities and homeowners when homelessness is likely as a result of repossession.’

Another way that mortgage prisoners may be able to get help is by bringing legal action against the private companies that now control their loans.

The law firm Harcus Parker is currently working with some mortgage prisoners in order to pursue such claims, but the process is at an early stage.

The FCA and Treasury have been contacted for comment.

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