In recent years, changes to the way that mortgages are underwritten has left thousands of borrowers trapped on a lender’s Standard Variable Rate (SVR) or other uncompetitive products.
These ‘mortgage prisoners’ have been forced to pay higher interest rates on their borrowing as they have been unable to switch to a better deal, perhaps due to their income, credit history or property value.
Now, the City regulator has relaxed the rules in order to help mortgage prisoners access cheaper deals. Keep reading to find out what the rule changes are, who they might help, and why some experts believe the regulator could have gone further.
Thousands of borrowers could benefit from rule change
Thousands of mortgage prisoners stuck on expensive mortgages for years could be allowed to switch onto lower interest rates after the Financial Conduct Authority (FCA) announced changes to lending rules.
The FCA has removed barriers that prevent borrowers from switching to a cheaper deal, estimating that 30,000 mortgage prisoners will benefit from the move.
Following the 2008 financial crisis, affordability rules were tightened while lenders toughened up their criteria for agreeing new mortgages. What this meant was that many borrowers who had taken out a mortgage before the rules changed no longer fitted a lender’s criteria in terms of income, outgoings or credit score.
Unable to switch to a better deal, these borrowers have been stuck on higher rates with their lender, despite interest rates falling to historic lows. They have therefore been forced to pay significantly more than the prevailing rates simply because they haven’t been allowed to switch to a better deal.
Now, new rules that came into force in October allow lenders to use more ‘proportionate’ affordability checks for borrowers who meet certain criteria, including:
- Being up to date with payments
- Not looking to move home
- Not wishing to borrow any more
The modified assessment means lenders can choose not to apply the rigorous income and outgoings checks normally required under FCA rules.
Christopher Woolard, the Executive Director of Strategy and Competition at the FCA, said: “Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm. Mortgage prisoners are often stuck on more expensive mortgages.
“We are removing barriers to switching in our rules and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible.
“We are also taking steps to help those who have mortgages with inactive lenders or unregulated entities to ensure that they are aware that they may now be able to switch and save money.”
In addition to removing some of the barriers to customers switching, the FCA will also now allow eligible borrowers to finance intermediary fees, as well as product or arrangement fees, through the new mortgage.
Experts say the FCA has not done enough
While the scheme ought to help some borrowers stuck on high rates who simply want to switch to a better deal without moving home or borrowing more, the scheme is currently voluntary. And, by the FCA’s own analysis, only between 2,000 and 14,000 of an estimated 140,000-plus mortgage prisoners are likely to benefit from the reforms.
Another issue with the rule changes is that it fails to tackle the issue of borrowers who are with ‘inactive firms’. These are mortgages with companies who no longer lend, and therefore do not have any active deals to switch borrowers onto.
UK Finance Director of Mortgages Jackie Bennett says that, once the FCA publishes up-to-date information on borrowers who are with inactive firms, lenders will be able to develop products where it suits their risk appetite to do so.
But she warns: “There is a risk that the regulator’s changes could unduly raise expectations among some customers on reversion rates, who must now be contacted but may find they are unable to secure a new mortgage.
“In particular, this may include customers of inactive firms who are in negative equity, in current or recent arrears or on an interest-only mortgage with no repayment strategy.”
Get in touch
If you’re on your lender’s Standard Variable Rate, or you think you’re paying more for your mortgage than you need to, please get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.