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Mortgage prisoners could be freed by new regulations

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Written by:
10/01/2019
Borrowers locked into an expensive rate with a lender that no longer operates could escape their deal and move to a cheaper mortgage
Mortgage prisoners could be freed by new regulations

The regulator is to consider changes to its ‘responsible lending’ rules, to allow mortgage prisoners to finally be free to switch.

Who are mortgage prisoners?

Mortgage prisoners are those borrowers locked into an expensive mortgage deal and unable to switch because new lending rules now deem their mortgage borrowing unaffordable.

Why are they locked in?

Following the credit crunch, tighter mortgage rules were introduced to protect consumers from overborrowing. But an unintended consequence of the regulations was that some existing borrowers found themselves unable to get a new mortgage under the stricter borrowing rules.

This was a problem because those borrowers had often reverted to their lender’s standard variable rate, which is usually higher than alternative options. It led to a situation where borrowers were told that a new deal was technically unaffordable to them, despite the monthly repayments actually being less than they currently pay.

What has already changed?

Most lenders have already agreed to offer their own borrowers switching options, so they can move from a standard variable rate to a cheaper two-year fix for example.

But one group of borrowers were still locked in – those holding mortgages with lenders that no longer offer mortgages. Their own lender cannot offer them a new deal and others lenders have until now been unable to take them on because they don’t meet new affordabilty criteria.

The latest announcement

This week the regulator said it is planning to consult on its responsible lending rules to enable lenders to offer a ‘proportionate affordability’ calculation. This is important, because it means that, if the new deal is cheaper than what the borrower is currently paying, it can be considered affordable.

And that could potentially free tens of thousands of mortgage prisoners from their current deal.

Will everyone be able to switch to be a better deal?

No, the regulator is not asking lenders to take on every borrower, regardless of their circumstances, so those with high arrears or in negative equity may still be stuck. But borrowers who are up to date with repayments and are not looking to borrow any more money should be eligible to find a cheaper deal.

Jackie Bennett, director of mortgages at UK Finance, said: “It is a positive step that the regulator has set out the action it will take to help those customers stuck on reversion rates who are with inactive or unregulated lenders.

“The FCA has noted the progress made through the industry’s voluntary agreement to help borrowers with active lenders switch to a better deal.

“But it has also recognised that regulatory changes are needed to remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders.

“We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily.”

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