Thousands of mortgage prisoners trapped in home loans can move to cheaper deals

AROUND 150,000 mortgage borrowers who are trapped on expensive home loans may soon find it easier to switch to a cheaper deal.

The city watchdog has announced plans to loosen its often restrictive lending rules, which should make it easier for borrowers to remortgage.

Why are borrowers trapped?

There are two main reasons why borrowers find themselves trapped.

The first issue affects around 30,000 home owners who took out their mortgage or last switched before the financial crisis.

After the crash, lenders introduced tough new rules making it harder for existing borrowers to switch around.

The second problem affects around 120,000 borrowers whose existing mortgage lender isn't authorised to give out new loans or to offer them a remortgage.

I'm terminally ill and trapped in my home

CHRISTINE KINSELLA, 60, drew up a bucket list of dream holidays when she was diagnosed with a terminal lung disease.

But instead, the hospital worker will spend her final years working to pay off her mortgage, which she says is stuck on a “stupidly” high interest rate.

Christine’s mortgage problems began a decade ago when her lender, Northern Rock, went bust.

It led to her and thousands of others being trapped on a sky-high mortgage tariff.

She has repeatedly tried to move to a more competitive rate.

But the best her new lender — Landmark Mortgages — says it can do is a variable “loyalty rate” of 4.54 per cent, down from 4.79 per cent.

Christine said her bid to escape the high rate became more pressing a year ago when she found she had idiopathic pulmonary fibrosis.

She said: “The life expectancy of this disease on diagnosis is three to five years.

“I haven’t deteriorated too greatly in the last 12 months and I’m on a new medication, so I hope that I have more than five years.

“But the thought of working full-time is just not fair, as I know I will deteriorate and be unable to work eventually.

“I would like to reduce my hours but I have to feed this voracious mortgage.

"I just hope I live long enough to pay it off.”

This means their only option is to switch elsewhere but again, they often don't meet new affordability criteria.

And when you can't switch or remortgage it means you're stuck on your lenders expensive standard variable rate that can cost as much as £2,5000 more a year.

What's being done to help mortgage prisoners?

To combat this issue, the Financial Conduct Authority (FCA) plans to introduce a "modified" mortgage assessment for borrowers who want to stay in their home, who are up-to-date with their mortgage payments, and who don't want to borrow more.

This more lenient assessment will apply to borrowers remortgaging with either their existing lender or who want to switch to a new provider.

So-called "inactive" lenders that can't give out new loans or remortgages will also be required to write to customers to tell them about the regulator's plans.

The FCA will consult on its proposals until June 26 with its final plans expected to be confirmed by the end of the year.

It hopes the new rules will then take force early in 2020.

Will the new rules help everyone?

The FCA admits that it can't help all borrowers and says the new rules are unlikely to help those borrowers in debt, with large loans or whose homes are in negative equity, which is where your property is worth less than the mortgage.

Nick Morrey, product technical manager at broker John Charcol warns that this is a problem. He also says it may be difficult to get borrowers to take action even when the new rules take force.

He said: "What we're yet to see is which lenders will be on board and what kind of products will they offer.

"The problem is what lender is going to help a borrower with a large mortgage, affordability issues, recent debt problems or those on an interest-only mortgage with no repayment plan in place?

"The second problem is borrower engagement. It's all well and good telling borrowers they can move their mortgage but it’s how the FCA will link these mortgage prisoners up to a solution.

"Mortgage prisoners do deserve better treatment than some of them have had but these aren't easy problems to resolve."

Dilpreet Bhagrath, a mortgage expert at broker Trussle, believes that getting borrowers to actively switch is already an issue in its own right – something Citizens Advice raised in a super-complaint on the "loyalty premium" last year.  

She said: "It is worth nothing that there is another major issue at hand which are those people who are sitting on a high standard variable rate for six months, and in most instances they are sitting on this for five years or more.

"We need to see greater efforts made to address this issue."

How to switch your mortgage

Here's what the Money Advice Service says you should watch out for when you're thinking about switching your mortgage:

  • When to switch your mortgage. You should check if you can save by switching your mortgage when your current deal is about to come to an end, if your lender changes your interest rate, or once a year if you're not tied into a deal with early repayment penalties.
  • How to find the best deal. You can use comparison websites to search for the best mortgage deal or, if you need a bit more help deciding what's best, use a broker. If you use a broker, check what fees it charges and if it can look for deals across the entire mortgage market.
  • Check for remortgage costs. There might be high early repayment charges to pay if you are leaving before the initial fixed period ends, and there may also be an exit fee if you leave your existing lender. When it comes to the new lender, you might be charged valuation and legal fees as well as a booking or arrangement. So check that it's worth switching once the fees have been taken into account.

Christopher Woolard, executive director of strategy and competition at the FCA said: “We are particularly concerned about consumers – who are commonly referred to as mortgage prisoners – who are currently unable to switch.

"That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage.”

The regulator is also looking at ways lenders can improve tools to make it easier for borrowers to know what mortgages they can get – and exploring ways it can help them to get the best broker.

The city watchdog first hinted at its shake-up back in January.

We've spoken to a number of borrowers who are trapped on their existing loan, such as self-employed Sharon Grey from London.

One terminally ill hospital worker also told us how she's trapped in her home by Northern Rock's sky-high mortgage.

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