New FCA Regulations will Set to Free ‘Mortgage Prisoners’

Currently, mortgage affordability assessments are stringent, making it tough, and for some impossible, to change their mortgage product to a cheaper fixed deal, despite having kept up with their current mortgage repayments. This has also resulted from many customers being with firms that are authorised to lend, but no longer active and lending new products to new and existing customers, and some that are with lenders who are not authorised for mortgage lending.

The FCA has identified about 150,000 ‘mortgage prisoners’ in the UK. 30,000 of which are customers of authorised mortgage lenders and 120,000 customers are with non-regulated firms which means it will be harder for the regulator to help them.

What is a ‘mortgage prisoner’ and how have customers become trapped?

According to the FCA, most of the mortgage customers who are unable to switch their mortgage product fall into this category because they took out their mortgage before the financial crisis, and are likely to be self-employed and have an interest-only mortgage product. These consumers are now considered high risk by lenders due to major changes to lending practices during and after the crisis.

The FCA defines customers as ‘unable to switch’ if they would not be offered a new deal by their existing mortgage lender, or any other lenders in the market. This is mainly because the Mortgage Credit Directive (MCD) requires lenders to carry out full affordability and credit risk assessments on all new customers, even if they are not borrowing more and simply want to re-mortgage onto a cheaper, fixed deal.

However, the FCA has previously allowed lenders to waive these requirements under certain conditions, including where the customer isn’t borrowing more and have made all mortgage payments up to date, but very few lenders took advantage of this flexibility at the time.

What is the FCA doing to help mortgage prisoners?

Regarding this issue, the FCA has stated “We are concerned about this situation, which has developed in light of a very significant market and regulatory correction and could be harming a number of customers who are paying more than they should. We would like to resolve this legacy issue and propose to explore possible solutions with industry and consumers.”

The FCA has proposed that lenders can now choose to carry out more “proportionate” affordability assessments to those who are up to date with their current mortgage payments, aren’t looking to borrow more, and want to switch to a product with a cheaper interest rate or monthly repayments. Lenders also won’t have to use a ‘stress test’ which assesses whether borrowers would still be able to afford their mortgage if interest rates were to rise by 1%.

As well as relaxing affordability tests, the FCA is also asking that unregulated and inactive firms contact eligible customers (customers who have been up-to-date with payments for at least 12 months and on a reversion rate) who are trapped to tell them that they can switch mortgage deals.

Some mortgage customers still won’t be helped

Even with the new proposed changes in place, the FCA says that unfortunately some customers will still struggle due to them being too high of a risk to mortgage lenders.

This includes customers who;

• Have a mortgage with a particularly high loan-to-value
• Are in mortgage arrears
• Have considerable other debts
• Have a mortgage with negative equity (the amount outstanding on the mortgage is more than the property is worth – this happens when the property reduces in value after being purchased)

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