Are you stuck on a high mortgage rate because you’re unable to switch your deal? If so, then you might be one of the many thousands of “mortgage prisoners” in the UK.
While being a mortgage prisoner isn’t guaranteed to negatively affect you, it does remove the option to take a cheaper deal if your mortgage is on the expensive side.
One of the most common reasons why you may be a mortgage prisoner is because your previous lender “sold” your mortgage to another provider who is now inactive.
According to the Guardian, the Financial Conduct Authority (FCA) found that 195,000 households across the UK have had their mortgage debt sold to inactive lenders. About a quarter of these households (47,000) could benefit from a cheaper loan deal, but are unable to change.
So, are you a mortgage prisoner? If so, is there anything you can do about it? Read on to find the answers to these questions and more.
A mortgage prisoner may be trapped paying for an expensive deal
If you are unable to switch from your current mortgage deal for any reason, you may be considered a mortgage prisoner.
In most cases, mortgage prisoners took out their loan before the 2008 financial crisis, when lending rules were far more relaxed than they are today.
This meant that, as soon as the rules on lending were tightened, some of those who were given mortgages before 2008 no longer qualified under the more stringent measures. This prevented them from switching to a cheaper deal, locking them to a potentially unfavourable rate.
This is Money say that the average rate for a mortgage prisoner is 4.3%, but some have claimed that they are paying rates as high as 9%. Compare this to findings from Defaqto that claim the average rate of a two-year fixed-rate mortgage in the UK is 2.29%.
Many mortgage prisoners also borrowed from banks or lenders that subsequently went out of business during the financial crisis.
This meant that their loans were sold to new lenders who did not offer alternative deals and did not provide the same opportunities to access lower rates when compared to an active lender.
3 things you could do to escape your mortgage prison
Getting locked into your mortgage is tough to deal with, especially if you know you’re overpaying. Luckily, recent rule changes mean that there might be some steps you could take to break out of the situation. While these options will not work for everyone, here are three approaches you could try.
1. Try switching to a new lender that has relaxed their rules
The FCA introduced new provisions at the end of 2019 that gave mortgage lenders the ability to carry out a “modified affordability assessment”. This essentially allows a lender to waive certain strict affordability checks, potentially allowing you the chance to secure a new deal with them.
Theoretically, this option is available to anyone, but the decision about whether to waive these checks is entirely at the discretion of the lender.
Those with interest-only deals or very little equity in their home will most likely need to go through the full underwriting process instead of benefiting from relaxed measures.
Typically, though not always, a lender will be looking for someone with at least five years left on their mortgage, more than £50,000 left to pay, and who is fully up to date with their payments. It is also unlikely that they will let you borrow any more.
2. Switch to a cheaper deal with your current lender
Most lenders in the UK have agreed to help existing borrowers on standard variable rates who were previously unable to switch to a cheaper deal, provided they haven’t missed any payments.
This may mean you are eligible for a “product transfer”, where you are able to switch to another deal provided by your lender. These mortgages must be like-for-like, meaning that you cannot borrow any more, and they must be taken out on the same property.
However, if your lender is inactive, it is unlikely that they will have any alternative deals available for you to swap to.
3. Get the professional help of a mortgage broker
Whether swapping deals or switching lenders, the expert knowledge of a mortgage broker will help you find the best option available.
They can do extensive research on your behalf and save you the time and stress of doing it yourself. They also know which deals could be best for you and your situation and can explain them to you in an easy-to-understand way, helping you to make a decision.
Plus, many mortgage deals are available only to brokers and are not accessible if you approach a lender directly. Deals exclusive to brokers often offer a better rate than those freely available, so they may save you money in the long run.
Get in touch
If you’re unsure whether you are a mortgage prisoner, or you’d like to look at switching your mortgage to a more competitive deal, please get in touch. Email enquire@london-money.co.uk or call us at 0207 808 4120 to find out more.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.