The Financial Conduct Authority (FCA) has announced new proposals to help homeowners trapped in their current mortgage deals.
The new rules will allow lenders to exercise more lenient affordability checks for ‘mortgage prisoners’ who have found it difficult to remortgage.
For homeowners stuck on interest-only deals and unable to pay off their loans, this could be particularly helpful.
Find out how the proposals could affect you, and what you should do if you are struggling to remortgage to a better deal.
What are mortgage prisoners?
Before the 2008 financial crisis, the rules around mortgage lending were much more relaxed, and lenders ran less stringent affordability tests when they were deciding how much to offer – but now, tighter regulations mean lenders have to be much stricter.
This has left thousands of homeowners trapped on old deals with high rates of interest, unable to remortgage to a better deal and effectively turned into ‘mortgage prisoners’.
Say you were approved for a mortgage with monthly repayments of £400 before the 2008 crisis. If you’ve met every repayment on time, you might think that you’ve proved that you can afford this amount each month.
But recent responsible lending regulations could make it difficult for you to be accepted for a £300-a-month mortgage, despite it being less than what you’ve shown you can afford.
The FCA’s new proposals aim to help people in situations like this.
What the FCA is proposing
The main goal of the FCA’s proposed rule changes is to ensure consumers who are unable to switch are given ‘fair treatment’.
In practice, this means allowing lenders to carry out a modified affordability assessment for would-be switchers who have made all their payments on time and are not asking to borrow more.
Lenders will be able to make their own judgment calls over which customers should be given the modified assessment on a case-by-case basis.
The FCA estimates there were around 30,000 mortgage prisoners with authorised lenders across the country in 2016, many of whom could potentially be ‘freed’ under the new rules. There could be up to 150,000 mortgage prisoners when other lenders are included.
The final rules will be published at the end of this year, with a view to them coming into force shortly afterwards.
Who these new guidelines will help
Loosening these regulations will have a liberating effect on thousands of customers, including:
Long-term mortgage prisoners
People who have been struggling to switch to cheaper mortgage deals for years will feel a huge relief.
When the rules come into place, these customers should immediately find it easier to get a better deal.
Under pre-crisis rules, you could have been accepted for an interest-only mortgage – where you pay off just the interest, not the actual loan each month – even if you didn’t have a plan for how you would repay the capital.
If this applies to you, the FCA’s new proposals could be the difference between a strict affordability check that leads to your home being repossessed when your mortgage term is up, and a more proportionate check that allows you to switch.
Getting a cheaper mortgage deal could even help interest-only mortgage prisoners pay off some of their actual balance.
Cheaper monthly repayments would allow you to overpay your mortgage (perhaps by the difference between your old deal and your new deal) and pay off the loan month by month.
And, if you’re nearing retirement, a retirement interest-only mortgage might be another viable option.
People with inactive or unregulated lenders
As part of these proposals, the FCA is also urging unregulated and inactive lenders to contact customers whose introductory rates have ended, and who have been up-to-date on repayments for 12 months, to let them know they can switch.
People with mortgages from these lenders are at risk of becoming mortgage prisoners, as switching would require passing an active lender’s affordability checks.
Potential mortgage prisoners
Thousands of the people that these proposals will help might not even realise they’re affected.
In most cases, you don’t find out you’re a mortgage prisoner until you’re applying to remortgage.
Thankfully, under the new system, whether or not you would have been a mortgage prisoner will be a moot point, as switching should be less of a struggle.
Why should you switch mortgages?
Even if you can easily afford your current repayments, remortgaging once your initial period ends is nearly always advisable.
This is because your lender’s standard variable rate (SVR) – the rate you’ll usually revert to when your introductory period ends – is likely to be much higher than the introductory rate on a new mortgage.
On top of this, you’ll likely have built up more equity in your home, so you may be able to borrow at a lower loan-to-value ratio (LTV) – meaning cheaper deals.
Which? research on remortgaging in 2018 found that homeowners on SVRs could save as much as £4,000 a year – that’s more than £300 a month – if they switched to the cheapest equivalent deal.
The FCA estimates that there are around 800,000 people who could switch to a cheaper mortgage but haven’t.
- Find out more: remortgaging: how to save thousands on your mortgage
Editor’s note: this page has been updated with new data.