A Guide to Mortgages for Over 50’s
Mortgage Prisoners: A light at the end of the tunnel?
An update from BB Mortgages
By James Carpenter
“I believe in excellent service and flexible appointment times.”
Mortgage Prisoners: A light at the end of the tunnel?
Economists estimate that there are around a quarter of a million mortgage prisoners in Britain at the moment. Many believe that this is largely the fault of the 2008 financial crisis, with Martin Lewis saying that:
“The government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since.”
Finally, now it seems that thanks to research and campaigning, there may be a light at the end of the tunnel for those who are trapped in a mortgage that they can’t afford but also can’t escape…
What is a mortgage prisoner?
A mortgage prisoner is someone who wants to re-mortgage but is trapped in their current deal. This can happen for a number of reasons but is usually a result of either the fall in house prices which happened in 2008-2009 and left a lot of people with negative equity in their homes or because of stricter affordability rules which the FCA (Financial Conduct Authority) introduced in 2014.
FCA support for mortgage prisoners
The FCA have done what they can to make things fairer for people who are trapped in mortgages they can’t afford. They have amended their responsible lending rules to allow lenders to base their decision on your payment history rather than on affordability. However, this has had limited impact and many believe that more needs to be done.
What do mortgage prisoners need right now?
Recent research by the LSE (London School of Economics) has suggested a number of ways in which the government can provide additional support to mortgage prisoners. It suggests that two of those measures should be put in place immediately:
The LSE suggest that borrowers should be given better information about their options and who owns their debts, so that they can make more informed decisions on how to manage their mortgage choices.
They have also recommended that the government provide better signposting and funding for debt counselling and advice for people who have found themselves trapped in a mortgage that they can’t afford.
6 Potential solutions for mortgage prisoners
The LSE paper also suggested 6 longer term strategies that could support people who are trapped in mortgages they can’t afford.
Government equity loans
Many mortgage prisoners have interest-only mortgages, meaning they’re only paying off the interest and not the balance of the debt each month. This in turn means they won’t have built up equity in their homes, so the loan-to-value ratio (LTV) of any new mortgage they apply for will often be too high for a lender to accept. This problem could be solved with an equity loan from the government which could reduce the LTV and so make it easier to re-mortgage.
When someone is in arrears with their mortgage, or has negative equity, then it’s almost impossible for them to re-mortgage. For this reason, the LSE suggest that the government provide incentives for lenders to write-off all or parts of mortgage prisoners’ debts.
Remove ‘Together loans’
The Together loan was a hybrid product from Northern Rock before the 2008 crash. It gave customers a high LTV mortgage and an unsecured loan at the same time. Customers paid these back in a combined monthly payment. The problem came when people switched their mortgage to a different provider. The unsecured loan’s interest rate shoots up to what many have seen as a punitive amount. The LSE London research suggests that the government investigate a method to decouple the loan and mortgage elements in a way that customers can afford.
Housing Association buy-out
In order to protect mortgage prisoners from eviction when they can no longer afford their mortgage, the research recommends that they could stay in their homes as tenants, with housing associations buying their properties. People could then have the option to buy their homes back at a later date.
Increased FCA regulation
Closed book mortgages are loans which were borrowed from companies who are no longer lending and so no longer fall within FCA regulation. In many cases, these customers find it very difficult to swap to a new deal and so are stuck paying expensive rates. Bringing these lenders under FCA regulation would give the FCA greater authority to ensure customers are treated fairly.
SVR (Standard Variable Rate) Caps
These types of closed book mortgages generally come with very steep SVR’s and campaigners have been saying for a long time that bringing in SVR caps would help to reduce the number of mortgage prisoners in the UK.
Although, the LSE research suggested that the difference between the high SVRs of closed book mortgages and those that customers would be able to switch to, would be minimal for most customers.
Next steps for mortgage prisoners
If you’re currently trapped in a mortgage that you can’t afford, then it’s important to get some support before your debts become unmanageable.
Charities like StepChange can offer you free and impartial advice to help you to manage your finances and your debts.
It’s also worth chatting to a Mortgage Adviser who can look at your specific circumstances and let you know what options might be available to you to help you reduce your monthly mortgage payment.
Here at BB Mortgages, we offer free consultations with our expert advisers, so don’t keep struggling alone and let us help!