Holly Bennett
Tim Leonard
Once a mortgage deal ends, homeowners can usually choose to switch deals to try to save money. But for mortgage prisoners that’s not an option and they’re stuck on an unaffordable rate.
For many, it could be an upsetting and financially damaging position to be in, but steps have been taken to help mortgage prisoners. We explain why a borrower might be in this position and the possible routes out.
What is a mortgage prisoner?
Mortgage prisoners are homeowners who are stuck paying high interest rates on their mortgages because they aren’t able to switch deals. This is even though they are up to date with payments and might save money if they switched to a more competitive rate.
Once an introductory mortgage rate ends, if you don’t move to another deal you typically move on to your lender’s standard variable rate (SVR). This is usually more expensive than the rate you’ve been paying and can mean a leap in monthly payments – and for mortgage prisoners, there is no option to switch to a lower rate.
The regulator of financial firms and markets in the UK, the Financial Conduct Authority (FCA), estimated that in 2021 there were 47,000 mortgage prisoners in the UK with inactive or unregulated lenders. This figure doesn’t include people who are behind on payments, possibly through being tied to paying high interest rates.
Why interest rates matter
Securing a lower interest rate on your mortgage can substantially reduce your monthly payments. That’s why some borrowers switch to new deals once their introductory rate has ended.
According to calculations by the campaigning organisation UK Mortgage Prisoners group in March 2021, a mortgage prisoner with an average £165,000 mortgage would have effectively ‘overpaid’ between £25,000 and £45,000 in the 10 years before through being trapped on high interest rates. These estimates will only have increased in the years since.
Why do borrowers become mortgage prisoners?
You might have become a mortgage prisoner for some of the following reasons:
You took out your mortgage before 2014
In 2014, rules were introduced by the FCA requiring lenders to carry out more rigorous affordability checks on mortgage borrowers. The aim was to prevent a repeat of the financial crisis of 2008, which was partly driven by people being able to borrow more than they could afford. However, it also meant that someone who was accepted for a mortgage before 2014 might not pass the new affordability tests and may not be able to remortgage.
Your provider is inactive or unregulated and can’t offer other mortgages
In 2021, the FCA said that 195,000 borrowers had mortgages with inactive firms, though the regulator did not consider all of these mortgage prisoners. An inactive firm is a lender that doesn’t lend to new customers or isn’t a lender and so may not be regulated by the FCA.
Most mortgage prisoners have mortgages with inactive firms that stopped offering new loans. These included Northern Rock and Bradford & Bingley, which were nationalised after the 2008 financial crisis.
Borrowers in this predicament can’t move to another deal with their inactive lender and may struggle to move to an active provider because they can’t pass the stricter affordability checks.
You have negative or low equity
Property equity is the amount of your home you own, mortgage-free. The house equity you have can rise because the value of your property rises and/or because of the payments you make towards your mortgage over time. However, you can also have a lower amount of equity in your home than when you bought it, or little or no equity.
This could be because the value of your home has fallen. Or it could be as a result of taking out a high loan-to-value (LTV) mortgage, and borrowing a large amount in proportion to the value of the property. In early 2008, Northern Rock was offering Together mortgages for up to 125% of a property’s value as a loan – letting people borrow more than their home was worth.
If the amount you owe on your mortgage is higher than the value of your property, you are in negative equity. And in this situation it can be difficult, if not impossible, to remortgage.
» MORE: What you can do about negative equity
You have an interest-only mortgage but no repayment plan
If you were accepted for an interest-only mortgage without a clear plan to repay it at the end of the term before the rules became stricter, you may struggle to remortgage. Lenders won’t offer an interest-only mortgage without a repayment strategy. Talk to your lender as soon as possible if this is your situation.
What help is there for mortgage prisoners?
In 2019 the FCA brought in rules designed to help mortgage prisoners switch to a more affordable deal. This includes a more flexible way for lenders to decide if the loan is affordable for the homeowner.
The modified affordability assessment
The rules let lenders look at a borrower’s payment history and reliability in paying, instead of their income and spending. This is to help mortgage prisoners who struggle to pass standard affordability checks move to a more affordable interest rate.
An intra-group switching rule was also introduced, where inactive lenders could offer borrowers the option of moving to an active lender within the same financial group without an affordability assessment.
Lenders are required to write to the mortgage prisoners on their books to explain their options for remortgaging, bearing in mind the new rules.
Are you eligible for the modified assessment?
If you are a mortgage prisoner, to be eligible to transfer your mortgage under the altered affordability criteria typically you will:
- Have received a letter from your existing lender confirming you are a mortgage prisoner
- Have a residential mortgage on the same property (not buy to let or consent to let)
- Have not missed any mortgage payments in the last 12 months
- Do not want to borrow any more money on your mortgage, except if you need to finance broker or mortgage fees for the switch
- Do not want to remortgage to move home
- Have not made any changes to the borrowers listed on the mortgage.
You will also usually need to have:
- At least £50,000 still to pay on your mortgage and have a property that is worth a minimum of £60,000
- A maximum 85% LTV ratio
- A remaining mortgage term of at least five years
- A clear repayment plan if you have an interest-only mortgage and aren’t switching to a repayment mortgage
If you meet these criteria, lenders may use the modified test to offer you a remortgage deal, provided it’s more affordable than the one that you’re on at the moment.
Have the changes helped mortgage prisoners?
Unfortunately, the new rules haven’t led to all mortgage prisoners being offered a remortgage, so many are still paying over the odds. There was no guarantee that borrowers would be able to switch deals, but the results suggest that the problem is far from solved.
Even with the more flexible rules in place, the FCA predicted that 14,000 (less than 10%) of mortgage prisoners would be able to switch mortgage deals. However, its 2021 review found that just 200 borrowers under the modified approach were able to move to a new deal with an active lender.
Why the low numbers?
Some borrowers may still find it hard to remortgage. These include older borrowers, people with negative equity and homeowners with a high LTV.
The modified rules are voluntary, so lenders don’t have to offer them. Added to that, the 2021 review found that not all borrowers responded to letters offering switching options, though the reason for this isn’t clear. More positively, at that time, 2,000 borrowers with inactive firms had managed to switch without needing to access the modified assessment.
How to remortgage if you are a mortgage prisoner
If you think you may be able to remortgage under the new affordability rules, you could get in touch with a mortgage adviser or broker. They can access a number of lenders and offer specialist advice for next steps.
Not all brokers charge a fee, but broker costs and mortgage fees through switching may be added to your new mortgage loan, if you can’t pay them upfront. However, this effectively means you will be paying interest on them for the duration of your mortgage.
If you can demonstrate that your mortgage is still affordable, other routes that your lender might suggest include the following:
- If your lender is active, you may be offered a product transfer, where you switch to another rate with your current lender. As long as you are not borrowing more or changing anything, this won’t usually involve an affordability check.
- If your lender is inactive but part of a bigger financial group, your mortgage adviser may be able to find you a switch to another provider within the group.
- If you have an interest-only mortgage with no repayment plan, switching to a repayment mortgage (in part or completely) may be an option, though this may depend on your age and how many years are left on your mortgage term, and may increase your monthly payments.
- If you are over 55 you may be offered a retirement interest-only mortgage or equity release as possible options.
- Your provider may look at your individual circumstances to help them make a decision.
If you are struggling with mortgage payments, talk to your lender as soon as possible. You can also get free advice from Citizens Advice and debt charities, including StepChange and National Debtline, to help you find a way forward.
» MORE: How remortgaging works
Image source: Getty Images
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