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Mortgage prisoners

The term mortgage prisoners was coined shortly following the 2008 financial crisis, when it was discovered that the lenient lending practices mortgage lenders had used in previous years, such as self certification products, had left many people totally financially unable to remortgage. In many cases, this included the inability to remortgage with their own lender (product transfer) as the mortgage provider they are with has since become inactive, and therefore unable to offer new mortgages. Whilst many of today’s mortgage prisoners are from this era, in more recent years some people have fallen into the same trap due to changes in their own circumstances, such as job loss, especially as a result of the covid 19 pandemic. Going forwards, the 2022 financial crisis and drastic interest rises have the potential to leave many others in this mortgage limbo. Below we’ll look at mortgage prisoners in further detail and make some suggestions on how to best avoid finding yourself in these unfortunate circumstances.
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What is a mortgage prisoner?

The FCA (Financial Conduct Authority) applies the term mortgage prisoner to borrowers who are up to date with their mortgage repayments, but are unable to switch mortgages, where it might benefit them to do so. 

The main reason for this is largely due to a tightening of lending criteria since people took out their mortgage, meaning that they no longer qualify for a new mortgage large enough to cover the value of their home. Other things have also contributed to and worsened this situation, such as the general rise in property prices, making it even more difficult to meet the affordability criteria for a property that they already live in. 

On the other hand, landing in negative equity (where you owe more than the value of your home) is another way to become a mortgage prisoner. Lenders see those in negative equity as being too risky to lend to, so it’s unlikely that anyone in these circumstances would qualify for a remortgage. 

Any decline in personal financial circumstances also has the potential to leave you trapped as a mortgage prisoner, especially if the lending criteria has become stricter and/or the interest rates have risen significantly since you took out your mortgage. When you switch mortgages, new lenders will reassess your affordability for the loan, so it’s perfectly possible that in any or a combination of these situations, you would no longer qualify for a new mortgage on your home.

Of course, some people will have the option to do a product transfer, but in the current climate in 2022 where interest rates are significantly higher than in recent years, there won’t necessarily be a cheaper option available with your existing lender. Unfortunately for many mortgage prisoners that were created after the 2008 financial crash, this is no longer an option, as many of their lenders have since become inactive (or closed book lenders). 

Why are you stuck with an expensive mortgage?

The majority of mortgage prisoners are on expensive rates that they are unable to escape from for one of the reasons outlined above. The reason that the rates are so expensive in this situation is down to the fact that the vast majority of people in these circumstances will be on their lenders SVR (standard variable rate). 

Each lender has their own SVR and this is basically a rate that has no form of fixed-term, introductory or discount period, meaning it’s typically the highest in their range. 

Anyone who took out a fixed, or any other form of lower introductory rate would have automatically defaulted onto this rate when they were unable to remortgage, or in the case of those with inactive lenders, because that’s likely the only rate they have. 

Unfortunately this issue has become even more problematic for mortgage prisoners by the last quarter of 2022, where typical SVRs are 5-6%. There is also the potential for these rates to rise even further if the Bank of England's base rate rises again, having risen seven times in 2022, and currently sitting at 3%.

What to do if you are a mortgage prisoner?

Depending on your current circumstances, and the reason you became a mortgage prisoner in the first place, there are a few things that you may be able to do to improve your situation, or prevent yourself from falling into the mortgage prisoner trap in the future. 

In 2019 the Modified Affordability Assessment rules offer the greatest glimmer of hope for many mortgage prisoners, however, they will only apply to those in specific circumstances. You can read more about this option in our dedicated section below

If you are one of the unlucky mortgage prisoners unable to benefit from the Modified Affordability Assessment rules, but are with an active lender, you can always consider a product transfer rather than a remortgage. Lending criteria is much less likely to be a barrier to this type of mortgage switch. 

That said, if your lender is unable to offer you a more competitive rate, or you are with an inactive lender you could try the following:

  • Overpay your mortgage, if possible, to try and gradually increase your equity, putting you in a more attractive position for future remortgage potential

  • If overpaying is not an option, you will be in a better position if you can at least maintain your existing mortgage repayments, as mortgage debt will make this even more difficult to overcome

  • Consider if there are any significant lifestyle cutbacks you could make in order to increase the level of income available when your affordability is assessed for a remortgage

  • Downsize your property, as you may qualify for a new mortgage more easily for a smaller property, and the equity in your existing property is likely to lower the LTV (loan to value) ratio of your borrowing for a lower cost home 

  • Speak to a mortgage broker with experience in helping mortgage prisoners specifically. They will be aware of which lenders have more flexibility with this type of issue

What are the Modified Affordability Assessment rules?

The Modified Affordability Assessment are new guidance that were introduced in 2019 by the FCA (Financial Conduct Authority) to allow lenders a little more flexibility when it comes to assessing whether mortgage prisoners are able to match their remortgage criteria.

If a lender can show that the new mortgage is more affordable than the customer’s current deal, they have the choice (but not duty) to overlook some of their typical lending criteria, such as the income and expenditure assessment. Building societies are, on the whole, more likely to make use of this guidance, although 95% of lenders originally agreed to implement these regulations when they came into place.

The rules state that, in order to benefit from them, a borrower must be: 

  • Up to date with their payments

  • Stay in the same property

  • Not borrow additional money

Are you eligible to change mortgages under the Modified Affordability Assessment rules?

Anyone initially able to benefit from the new rules should have received a letter prior to 2020, advising them of their potential ability to break free from their mortgage prisoner status. However, it’s important to understand that each lender has different criteria to meet and this does not immediately make you eligible for one. 

Although every lender can choose to implement the guidance as they see fit, some of the general criteria you may need to meet (in addition to the above rules within the guidance) in order to qualify may be:

  • Having a minimum of five years remaining on your mortgage

  • Having an outstanding mortgage balance of at least £50,000 and property value of at least £60,000

  • The loan to value of your borrowing should typically be below 75-85%

  • The remortgage needs to be on your 

  • Residential mortgages only, not buy-to-let

  • Usually the borrowers cannot be amended (added or removed) although exceptions may be made when partners have passed away

  • As well as being up to date with payments, as defined by the regulations, many lenders will expect you not to have any missed mortgage payments in the last 12 months

  • Usually you will need to remain on or transfer onto a repayment mortgage, rather than interest-only

What about if I’m on an interest-only mortgage?

If you took out an interest only mortgage, you’ll usually need to switch to a repayment plan, unless you have a substantial and robust plan of how you will clear the mortgage balance at the end of your mortgage term, and can provide proof of this to the lender. 

Unfortunately age can become a factor here, as if you need to transfer onto a repayment mortgage, the length of the mortgage term will typically need to be extended. It won’t always be possible to extend the term as long as may be necessary for older borrowers.

What to do if you can’t use the Modified Affordability Assessment rules to escape

Unfortunately there is currently very little help available for those mortgage prisoners who are not aided by the Modified Affordability Assessment rules, however, it’s worth reaching out to a debt advice charity to see if there is anything further they can help you with. Some reputable services that are available UK-wide are: 

How to avoid being a mortgage prisoner?

Although most mortgage prisoners are those who took out their mortgage prior to the introduction of the stricter affordability tests in 2014, there is certainly potential for the 

current economic uncertainty to create new ones, especially given that lenders have tightened up their criteria and re-introduced more rigorous affordability checks in recent months. 

If property prices fall, as they are expected to in the future, this will also contribute to a new generation of mortgage prisoners through negative equity, despite being up to date with their repayments. 

To some degree, it’s difficult to avoid these circumstances as an individual, as the likelihood is, those affected will already have mortgages and the circumstances that lead to becoming a mortgage prisoner will be out of their own control. 

There are a few ways to make sure that you qualify under the Modified Affordability Assessment rules, however, see the section above about what to do if you are a mortgage prisoner for further recommendations.

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