The term ‘mortgage prisoner’ refers to mortgage borrowers who find themselves unfairly trapped in old deals with high interest rates and with no prospect of remortgaging or paying back the loan. It is thought there are currently 150,000 such mortgage prisoners throughout the UK.
Unfortunately, they are victims of the irresponsible lending which was prevalent in the years leading up to the financial crash in 2008. It has become apparent that some people were given mortgages which were far too large for their circumstances, up to 125% of their income in some cases. Such deals would never be authorised today.
The majority of those affected took out mortgages with Northern Rock or Bradford and Bingley in the late 2000s. When the bank was taken into public ownership after the crash, their mortgages were transferred to Northern Rock Asset Management (NRAM), owned by UK Asset Resolution.
What has been the problem?
Customers were not offered a new fixed rate mortgage when their existing mortgage came to an end as the NRAM is what is known as a ‘zombie lender’. This means it is only licensed to handle the mortgages it already has in its portfolio but can not issue new mortgages or adjust customers’ current terms.
As a result, many customers have had no choice but to pay expensive standard variable rates; the rates anyone else would make every effort to avoid. Some customers have been paying more than 5% interest over the last 12 years, more than double the best rates on the market. This can make an astronomical difference over time, with one customer estimating he had paid over £32,000 more.
Regrettably, people in this position can not just switch to a cheaper mortgage with a different lender. As they were given mortgages that were too large, the loans make it look like they are in negative equity, so they fail the Financial Conduct Authority’s strict affordability criteria. This also means they are unable to sell their properties because they would not get enough to pay off the mortgage.
What is being done?
The Treasury has commented that it has “worked with the Financial Conduct Authority (FCA) to introduce new rules that remove barriers preventing some customers from accessing cheaper deals and will continue to work on this matter.”
In line with this, the FCA is relaxing its affordability criteria so that lenders can carry out more lenient checks. In future, the tests will be less stringent for customers who have made their payments on time, are not looking to move house or to borrow more.
Due to the changes, the regulator estimates that between 2,000 and 14,000 mortgage holders will be able to move to a fairer deal. However, this is likely to still leave more than 100,000 trapped on high rates. For many it is a desperate situation, with some facing the prospect of having their homes repossessed. Yet the FCA cannot force banks and building societies to take on unattractive customers.
The UK Mortgage Prisoner Action Group is adamant that something must be done and so it is in the process of bringing legal action. It believes mortgage companies have a duty to offer customers a fair rate, describing the innocent victims as ‘collateral damage’ after nationalisation.
15 January 2020
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