A new report from Britain’s financial regulator claims there could be as many as 30,000 ‘mortgage prisoners’ across the country who are stuck with expensive mortgages they can’t get out of.
The same report also claims that 30% of consumers are finding it difficult to find the cheapest deal for a new mortgage.
The Financial Conduct Authority (FCA) say the ‘mortgage prisoners’ became trapped in expensive deals when the Mortgage Market Review (MMR) came into force in 2014 creating much stricter lending criteria.
Borrowers who took out their mortgage on standard variable rate before the financial crisis of 2008 have become prisoners of their deals because they cannot meet the stricter lending criteria needed to secure a cheaper deal.
Some are even worse off because they have mortgages with lenders who no longer exist or aren’t regulated.
Financial expert Rachel Springall commented: “Highlighting the plight of mortgage prisoners is important, as not everyone will be able to move their mortgage if their circumstances change.
“Even if borrowers can demonstrate that they could afford a cheaper deal based on lower repayments, they could still be turned down if they are unable to prove they can cope with future interest rate rises.
“Tighter affordability checks are in place to prevent borrowers from getting a mortgage beyond their control, but there will still be consumers out there whose circumstances change and who could end up defaulting.
“The only options left for borrowers stuck on their deal would be to talk to their existing lender and seek a financial adviser to figure out where to turn.”
One proposed solution from the FCA is to obtain industry-wide agreement to approve applications from those borrowers who have always kept up to date with their payments.
But many borrowers are still paying off mortgages which have been sold to private insurers or equity firms which make the issue much more difficult – as with former customers of Northern Rock and Bradford & Bingley.
The regulator has issued the report for consultation and asked the industry for their suggestions on how to proceed.
The deadline for responses has been set for July 31st and the FCA plans to publish its final report by the end of the year.
The consultation also asks the industry for their ideas on how to improve the system for consumers to switch from their existing mortgage and find the best deal for them.
The FCA believes some borrowers could save as much as £550 a year by switching to a cheaper deal and that ‘undue barriers’ in the current system are ‘a significant impediment to shopping around,’
Other strategies for consideration including:
- making it easier for consumers, at an early stage, to identify for which mortgage products they qualify, to assess and compare those products and, ultimately, to take out a mortgage
- removing barriers to innovation in the sale of mortgages, including those due to aspects of FCA advice rules and guidance;
- making it easier for consumers to assess the strengths of different mortgage brokers.