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25 Jul 2019

Metro Bank sells £521m of mortgages to 'zombie' bank

Find out whether homeowners will be affected by the sale

Metro Bank has sold off a mortgage book worth £521m to an American hedge fund.

The embattled lender announced the sale as part of its financial results for the first half of the year, which showed year-on-year profits dropping from £20.8m to £3.4m.

Metro has also announced that its founder, Vernon Hill, will step down as chairman.

Here, we explain whether existing Metro Bank mortgage-holders should be concerned by the sell-off, and offer advice on whether now is the time to switch deal.

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Metro Bank sells mortgages to Cerberus

Metro Bank has confirmed that the US hedge fund Cerberus Capital Management has purchased a mortgage book worth £521m.

This comes after a tumultuous time for Metro, with shares plummeting since the Bank of England uncovered significant accountancy errors earlier this year. The gaffe resulted in £2bn of deposits being withdrawn in the first half of the year.

Metro's relationship with Cerberus is longstanding, although money has previously moved in the opposite direction: Metro has purchased £1bn-worth of loans from Cerberus in recent years, including a £520m buy-to-let portfolio in 2018.

Metro borrowers unaffected by sell-off

This morning, Metro Bank confirmed to Which? that the loan book it has sold off is one that it purchased from Cerberus back in 2017.

This means Metro's customers won't be affected by the sale, as none of the loans originated from or were managed by the bank.

Instead, the loans in question will continue to be managed by Capital Home Loans (CHL), a subsidiary of Cerberus.

Metro says there will be no impact on borrowers with mortgages from CHL.

What is Cerberus Capital Management?

Cerberus is a hedge fund that specialises in buying 'distressed' loans (which tend to either be from defunct lenders or those in financial difficulty), with past purchases including portfolios from Northern Rock and Bradford & Bingley following the financial crash.

Cerberus - which is named after a three-headed mythological dog that guards the gates to the underworld - isn't an 'active' lender.

It is instead classified as a 'zombie' bank, which holds loan books, but can't alter terms on existing mortgages or sell any new products to borrowers.

Does Metro Bank still offer mortgages?

Although Metro is going through a difficult period, the bank is still offering mortgages to residential buyers and landlords.

Which? analysis of Moneyfacts data shows, however, that it has significantly cut the number of residential mortgages it offers, from 127 a year ago to 62 today.

In the buy-to-let market, Metro currently lists 50 fixed and variable-rate products, down from 54 a year ago.

Should you remortgage away from Metro Bank?

If you've got a mortgage with Metro Bank, you may be considering looking elsewhere for a greater degree of stability.

In truth, though, there's no need to rush into switching deal if you're still on a good fixed or tracker rate.

Regardless of the lending decisions Metro makes in the future, your mortgage will proceed on the same terms as before, so it makes sense to wait until the end of your introductory term to switch.

You can usually agree a new deal up to six months before the end of your introductory rate, and you may find enlisting the help of a whole-of-market mortgage broker allows you to get a better rate.

Other lenders also changing offerings

This news follows a spate of changes in the mortgage-lending market.

Earlier this year, AA mortgages and Secure Trust Bank ceased lending, and Tesco Bank announced it would be selling off its existing loans.

Tesco is currently in the process of selling loans worth a whopping £3.7bn - although the rumoured interested parties include major high-street banks such as Royal Bank of Scotland and Santander, rather than inactive lenders.

Should borrowers be concerned about sales to 'zombie' banks?

While Metro customers needn't worry about this sale, there are wider concerns about lenders selling off loans to so-called 'zombie' banks.

Having a mortgage with a zombie bank can lead to borrowers becoming 'mortgage prisoners', stuck on a standard variable rate and unable to switch to a better deal elsewhere.

This is because it can be easier to remortgage with your current lender by doing a 'product transfer', which typically involves fewer affordability checks than if you were to switch to a different bank.

As zombie banks can't offer new products, borrowers may struggle to move away to a different lender if their circumstances make passing an affordability test tricky.

Buy-to-let landlords and zombie banks

Buy-to-let landlords are particularly vulnerable to 'zombie' sales for two reasons.

First, a sale to a 'zombie' bank means that any changes to a mortgage (such as releasing cash for renovations) will require a remortgage to a different lender. This is significant in the buy-to-let market, where mortgage set-up fees can often run to £2,000.

Second, buy-to-let affordability testing rules have undergone significant changes over the past five years, with landlords now needing to provide greater evidence that they can raise sufficient rental profits. This means that switching to another lender could now be more difficult if you've got a heavily mortgaged portfolio.

Landlords who are concerned about 'zombie' banks should consider splitting their portfolio across several lenders rather than relying on one bank for all of their borrowing.

This article was edited on 25 July to clarify that the mortgages being sold are not Metro Bank-branded mortgages, and current Metro Bank mortgage-holders will be unaffected by the sale.