How Can Mortgage Prisoners Escape to a Better Rate?
Thousands of homeowners are unable to move their mortgage to more affordable rates, even though they’re up to date with payments. We look at the reasons why, and possible ways out of this difficult situation.
Once a mortgage deal ends, homeowners can usually choose to switch deals to save money. But what happens when that’s not an option and you’re stuck on an unaffordable rate?
It’s a frustrating and potentially unsustainable 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 are mortgage prisoners?
Mortgage prisoners are homeowners who are stuck paying high interest rates on their mortgage 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 usually move on to your lender’s usually more expensive standard variable rate (SVR). This can mean a leap in monthly payments, sometimes by as much as double – and for mortgage prisoners, there is no option to switch to a lower rate.
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 tethered to high interest rates.
Why interest rates matter
Securing a lower interest rate can substantially reduce your monthly payments. That’s why some borrowers switch to new deals once their introductory rate has ended.
According to the campaigning organisation UK Mortgage Prisoners group, a mortgage prisoner with an average £165,000 mortgage will have effectively ‘overpaid’ between £25,000 and £45,000 over the last 10 years through being trapped on high interest rates.
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
Following the financial crisis of 2008, lenders had to use stricter borrowing criteria for people taking out a mortgage. In 2014, more rigorous affordability checks were introduced by the FCA. This 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
The FCA says that 195,000 borrowers have mortgages with inactive firms, though not all of these are considered mortgage prisoners. An inactive firm is a lender that doesn’t lend to new customers or has stopped being a lender and isn’t 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. You may have a lower amount of equity in your home than when you bought it, or little or no equity.
This could be due to plummeting property prices during the 2008 financial crisis, though they have since recovered in most areas. Or it could as a result of taking out a high loan-to-value (LTV) mortgage, such as Northern Rock’s Together mortgage. This offered 125% of the property’s value as a loan.
Lenders prefer taking on borrowers with a lower LTV and tend to reserve the most competitive rates for them. So if you are in negative equity or have a high LTV, it may be hard to remortgage to a lower interest rate.
You have an interest-only mortgage but no repayment plan
If you were accepted for an interest-only mortgage without a clear plan about how you will 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.
Your property doesn’t meet regulations
According to research from law firm Irwin and Mitchell, as many as two million borrowers may be mortgage prisoners due to cladding issues.
This may be due to unsafe cladding following regulation changes after the Grenfell Tower tragedy in 2017, or other fire safety issues with extremely costly solutions. This leaves the owner unable to remortgage and living in unsafe conditions.
What has been done to help mortgage prisoners?
To help address the plight of mortgage prisoners, in 2019 the FCA brought in rules that aimed to help those affected 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 new 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.
In 2020, inactive lenders had to write to mortgage prisoners on their books to explain their possible 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 you will need to:
- 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, unless you had a payment deferral due to the pandemic
- not want to borrow any more money on your mortgage, except if you need to finance broker or mortgage fees for the switch
- not want to remortgage to move home
- not be making 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
- an LTV ratio that’s no higher than the lender's maximum. This is usually around 85% LTV
- 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 freed 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 in negative equity and homeowners with a high LTV.
The modified rules are voluntary, so lenders don’t have to offer them. Since the changes, the FCA says that take up has been low, with some lenders reluctant to adopt the new rules. The effects of the pandemic may have also dampened lenders’ appetites to take a more flexible approach.
Added to that, not all borrowers responded to letters offering switching options, though the reason for this isn’t clear.
More positively, 2,000 borrowers with inactive firms 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 up front.
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 a borrower 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.
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Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more