Locked in: The mortgage prisoners unable to switch deal
‘Mortgage prisoners’ in London face swingeing annual interest payments of £9,400, as they remain trapped on their lender’s Standard Variable Rate (SVR), said Trussle.
The online mortgage broker said this totals more than a third (37%) of the average disposable income in the capital, and is triple the amount of interest paid by those locked into a deal in the North East.
At the same time new mortgage rates are at an record low – for those who can actually access them.
Why are borrowers trapped?
In 2014 the new regulations were introduced, forcing lenders to apply strict criteria, especially when they work out what loan size borrowers can afford to take out. This means that many of those who already have a mortgage can’t switch to a new deal under the tighter rules, leaving them stuck on their lender’s Standard Variable Rate.
Standard Variable Rates are almost always higher than new mortgage rates – significantly so in most cases.
Trussle said that the average SVR among the ‘Big Six’ lenders is currently 3.85%. The £9,364 in annual interest paid by mortgage prisoners in London could fall by a massive £6,591 if they were able to switch to the leading two-year fixed rate among the ‘Big Six’ (HSBC’s 1.14%).
Mortgage prisoners in the North East could save up to £2,130 if they hadn’t been caught out by the change to lending rules.
The disparity in interest paid by mortgage prisoners in the North and the South is the result of a major difference in outstanding loan value in each region.
In London, the average borrower has more than £243,200 left to pay on their mortgage, compared to £78,600 in the North East, where the annual interest paid by those who cannot switch is £3,025.
Other regions where mortgage prisoners will be hit hard include the East and South East of the UK.
Ishaan Malhi, CEO and founder of Trussle, said: “While some lenders do offer help to mortgage prisoners, too many are in effect holding these borrowers to ransom, while they collectively lose around £13 million per day in excess interest. This needs to change urgently.
“Our recent Mortgage Switch Guarantee proposals call for a new set of industry standards to be implemented to help borrowers on SVRs switch mortgage. One of the key proposals recommends that all lenders have some form of duty-of-care to their customers, possibly in the shape of offering a range of relief options to mortgage prisoners.”