Mortgage prisoners stuck on a standard variable rate may find a lifeline in the form of a new range of mortgage deals from Ipswich Building Society.
The mutual’s new ‘like-for-like’ range forgoes the usual strict affordability tests when assessing applicants – meaning those who have previously been turned down for a remortgage may be accepted.
The deals are aimed primarily at ‘mortgage prisoners’ – borrowers who took out their mortgage before the financial crisis, when rules around who could borrow what were far more relaxed than they are today.
Since then sweeping new regulations have redefined what a ‘good’ borrower looks like – meaning many who took deals before are now unable to move onto a better rate.
Those who have previously been turned down for a remortgage may qualify for the new deal
As a result, as many as 140,000 homeowners have slipped off their fixed rate deals over the past 10 years and onto their lender’s standard variable rate – unable to move to a cheaper deal even if they can afford to do so.
But Ipswich’s new range of products bypass some of these tighter rules, meaning borrowers who in the past have not been able to pass an affordability test to get a deal may now be able to do so.
How is this possible?
When a lender looks at a mortgage application, they have to make sure that the borrower would be able to afford the mortgage if their circumstances were to change.
This is what is known as ‘stress testing’, and will take into account the effect of possible interest rate rises and changes in the borrower’s lifestyle.
But this doesn’t necessarily have to apply when a customer is remortgaging and isn’t taking on any additional borrowing.
Lenders do usually stress test in these circumstances, but regulation does allow for affordability to be assessed on a non-stressed rate.
With this in mind Ipswich has designed its new deals so that the borrower is only assessed on their ability to pay the actual rate advertised, and not apply an additional stress when calculating affordability.
Certain restrictions do apply, such as the borrower needing to have been with their current lender for two years or more and having kept up their repayments.
Ipswich has struck a cautious tone when announcing its new deals, stating that to ‘ensure effective risk management’ and to ‘maintain the quality of its lending book’, the group will individually underwrite all of these like-for-like deals.
This of course means the deal won’t be a fix-all solution for all mortgage prisoners – applications will take time and it will be difficult for Ipswich to take on large volumes of borrowers.
Ipswich plans to individually underwrite each deal to minimise any risk to their mortgage book
On top of individually underwriting all deals, all applicants will have to have a minimum of two years’ history with their existing lender, a good credit record, and no material increases in secured borrowing.
So what’s on offer?
Ipswich is offering six deals to three different types of borrower: those in later life, those with a shared ownership mortgage, and standard residential applicants.
For borrowers aged 50 and over, there are two deals on offer up to 75 per cent loan-to-value.
The first is a two-year discount of 3.24 per cent to Ipswich’s standard variable rate of 5.74 per cent, resulting in a rate of 2.50 per cent. This deal offers unlimited fee-free overpayments and has no early repayment charges.
The second deal on offer for borrowers over 50 is a two-year fix at 2.75 per cent.
Both deals carry an application fee of £199 and a completion fee of £500.
Loans are available from five to 40-year terms, up to a maximum loan of £750,000. Both deals also come with a free valuation up to a maximum property value of £1million and fee assisted legals.
Applicants will have to have two years’ history with their lender and a good credit record
The society has also released a shared ownership remortgage deal allowing borrowers to take up to 90 per cent of the share. This is a two-year fixed rate deal at 3.25 per cent, with no fees attached.
Two standard remortgage deals are also now available up to 80 per cent loan-to-value with the new affordability criteria, the first being a two-year 3.19 per cent discount to 2.55 per cent, and a two-year fixed rate deal at 2.80 per cent.
Both products have an application fee of £199 and a completion fee of £800, plus a £35 money handling fee.
Chief executive Richard Norrington said: ‘By applying our manual underwriting approach, we are able to understand the personal circumstances behind each individual mortgage application.
‘This, coupled with our entrance into the like-for-like mortgage market, will enable us to provide greater opportunity for borrowers who find themselves with restricted access to other mortgage products due to guideline changes and the introduction of stress testing.’
While Ipswich’s rates might be on the more expensive side, they’re far from the worst rates on the market.
The group’s over 50s two-year fix up to 75 per cent loan-to-value sits at 2.75 per cent, while the average rate in this range sits at around 1.60 per cent.
Its 80 per cent loan-to-value deal carries a rate of 2.80 per cent, while most 80 per cent loan-to-value fall somewhere between 1.40 per cent and 1.60 per cent.
While these are on the pricey side, they are guaranteed to be cheaper than a lender’s standard variable rate, meaning applicants could see big reductions in their monthly outgoings if successful.
What else is being done to help mortgage prisoners?
The Financial Conduct Authority launched a consultation in March 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.
Some lenders have already made moves to help the mortgage prisoners on their own books.
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 written to any qualifying borrowers to inform them of their options.
How the financial crisis happened
In this episode of the This is Money podcast, editor Simon Lambert discusses the credit crunch and financial crisis with Georgie Frost.
Simon relives reporting on the crash of Northern Rock, on the credit crunch as it unfolded, the events that led up to it and the financial crisis that followed.
He also tackles the billion-pound bailout question: Could it happen again?
Listen to the episode below or listen (and subscribe) on iTunes , Acast, or Audioboom.