The UK’s biggest lenders have collectively agreed to help so-called ‘mortgage prisoners’ who are locked into expensive deals.
Earlier this week, the Financial Conduct Authority (FCA) announced that 59 lenders representing 93% of the UK’s residential market have pledged to set ‘common standards’ to help an estimated 10,000 mortgage prisoners.
Here, we explain how the measures will work and offer advice on what you can do if you’re on your lender’s standard variable rate (SVR).
What is a mortgage prisoner?
In its Mortgages Market Study interim report, the FCA identified a number of borrowers with mortgages on their lender’s reversion rate (SVR), who were up to date with their payments and would benefit from switching to a better deal, but were unable to do so. These people are commonly known as mortgage prisoners.
The phenomenon of mortgage prisoners occurred when borrowers took out fixed-rate mortgages before lenders introduced stricter affordability criteria. It meant that once their fixed-rate term ended and they were moved on to their lender’s SVR, they could no longer pass the affordability checks to move to a better deal.
What are lenders doing to help?
Some lenders have already been contacting borrowers about the opportunity to move to a better rate, but this agreement now formalises this process.
The lenders that are signed up have agreed to write to any qualifying borrowers by the end of 2018 if they haven’t already done so.
To qualify for a switch, borrowers must:
- be owner-occupiers with a mortgage from an active lender
- be on a lender’s reversion rate (SVR) and be looking for a like-for-like mortgage
- be fully up to date with payments
- have a minimum outstanding mortgage of £10,000 and at least two years remaining on their loan.
Which lenders haven’t signed the agreement?
UK Finance hasn’t provided details of which lenders haven’t signed up and why, but has said it expects more lenders to sign up to the agreement over the coming weeks and months.
Of the 10 biggest mortgage lenders, TSB is the only absentee to date, although it says it plans to join the initiative soon.
Fellow absentees Precise Mortgages and Aldermore both say they are currently reviewing whether to support the initiative.
What about the other 140,000 mortgage prisoners?
Initially, this commitment will help an estimated 10,000 customers with loans from active lenders, but this is only the tip of the iceberg.
The FCA is continuing to consider how to help the estimated 20,000 people who have mortgages with inactive lenders and 120,000 customers with unregulated mortgage owners – defined as those who are not part of UK Finance, the Building Societies Association or the Intermediary Mortgage Lenders Association.
What to do if you’re on your lender’s SVR
If you have a fixed-rate mortgage, you’ll be moved on to your lender’s SVR when the fixed term expires – meaning your rate is likely to rise significantly.
In this situation, remortgaging to a cheaper rate could save you a significant amount of money over the term of your loan.
You’ll need to do your research before locking yourself into a fixed-rate deal, as some longer fixes come with costly early repayment charges.
With thousands of mortgages on the market, it can help to get advice from a whole-of-market mortgage broker before taking the plunge.