These borrowers are unable to switch to an active lender in order to get a better deal as they are held back by more stringent affordability rules imposed by the regulator after the Mortgage Market Review in 2014 and the European Mortgage Credit Directive in 2016.
According to the Financial Conduct Authority, around 20,000 borrowers are stuck with an inactive lender, such as Northern Rock. But an estimated 120,000 borrowers have mortgages which have been sold on to unregulated firms, who do not have to abide by FCA rules – many books were sold by pre-credit crisis sub-prime lenders to investors.
Limited data on unregulated firms
The FCA holds limited data on mortgage books that have been sold to unregulated firms but the data it does have indicates that many of these loans are interest-only, high loan-to-value and credit impaired.
In its consultation paper, CP18/41: FCA and PRA changes to mortgage reporting requirements, the regulators propose to place a reporting obligation on the authorised administrators that service mortgages on behalf of these firms. That would give them more information about the mortgage held by these firms.
Changes to regulatory rules
In a letter to Nicky Morgan MP, chair of the Treasury Committee, Andrew Bailey, chief executive of the Financial Conduct Authority, said that barriers to switching mortgages in the regulatory rules need to be removed.
He wrote: “We intend to move the affordability assessment from an absolute test to a relative test. Thus, the test would be whether the new mortgage costs are more affordable than the current mortgage costs.”
Industry round table
The FCA hosted an industry round table last week and some lenders indicated they would be willing to consider taking on some of these mortgage prisoners through remortgaging “if commercially viable”.
However, there would be borrowers outside of the commercial risk appetite of lenders such as those in arrears, with very high LTVs, who have considerable debt or have mortgages in negative equity.
The proposals to remove regulatory barriers to switching will be published along with the final report of the Mortgage Market Study this spring.
Mark Harris, chief executive of mortgage broker SPF Private Clients, commented: “It has never made sense that borrowers are prevented from switching to cheaper mortgage deals because they do not meet their lender’s affordability criteria.
“Clearly they will be better able to make mortgage payments on a cheaper rate, avoiding missing repayments and getting into debt, which will only exacerbate their situation.
“This issue has caused extreme hardship in some cases and prevented mortgage prisoners from taking advantage of some of the cheapest mortgage rates we have ever seen.
“However, while we welcome news that the FCA is working to change the current system, how lenders interpret and apply any changes will be of equal importance. After various regulatory changes we have seen many ‘unintended consequences’, one of which led to mortgage prisoners in the first place.”
Jackie Bennett, director of mortgages at UK Finance, said: “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.”