Get out of jail free card for mortgage prisoners?

Thousands of UK mortgage prisoners may be handed a get out of jail free card as the country’s financial regulator unveils plans for a relaxation of switching rules which will allow them to get out of expensive deals.

In a letter to government the Financial Conduct Authority (FCA) said it intends to take ‘immediate action’ to change the rules and remove affordability barriers which currently prevent the ‘prisoners’ from re-mortgaging.

Affordability rules

Writing to Nicky Morgan, chair of the Treasury Select Committee, FCA chief executive Andrew Bailey said the regulator now wanted to change affordability tests so borrowers can look at whether current mortgage deals are more affordable than what they are on already.

Ms Morgan’s committee had asked the FCA to act quickly to help those affected by current regulations and get them signed up to a more affordable deal.

Problems

The problems arose when buyers who bought their homes before the financial crash did so when the lending criteria was much looser than it is today.

When the affordability rules were tightened in the Mortgage Credit Directive of 2016, the borrowers were no longer able to meet the eligibility tests of their lenders for re-negotiating their deals and slipped back onto the most costly standard variable rate deals.

No longer active

Additionally it is thought 20,000 of these borrowers are with dealers who are no longer active and another 120,000 are with firms which are not regulated by the FCA.

In both scenarios the borrowers are able to keep up with their current monthly payments, but they are far higher than they need to be.

Barriers

In his letter to Ms Morgan Andrew Bailey said: “We want to remove potential barriers in our rules to these customers switching to a cheaper mortgage.

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

More affordable

“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.”

Regarding those not covered by the FCA rules he said there had to be ‘a willingness’ from the industry to offer re-mortgaging opportunities to customers once the regulatory barriers are removed.

Trapped

Ms Morgan commented: “These customers are trapped on a far higher interest rate than is necessary through no fault of their own.

“The FCA has today announced that it will consult on changing its lending rules to allow such customers to switch to an active lender, with whom they may be able to get a better deal.

“The regulator must now act swiftly to help these 140,000 mortgage prisoners, and not use this consultation to kick the issue into the long grass.”

Positive step

UK Finance director of Mortgages Jackie Bennett comments: “It is a positive step that the FCA has set out the action it will take to help those customers stuck on reversion rates who are with inactive or unregulated lenders.

“We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily.”

Consultation paper

The FCA will publish a consultation paper on the issue ‘this Spring’ with a final report to be published later, but Mr Bailey warned that decisions by lenders would be commercial ones and not everyone might benefit.

Customers in arrears, with highly leveraged home loans, with other large debts or mortgages in negative equity were unlikely to qualify.