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4 Jul 2020

Mortgage prisoners: is capping rates the answer?

MPs call for caps to mortgage SVRs

Hundreds of thousands of homeowners trapped with mortgages they can't afford could face relief under new proposals from a cross-party group of MPs.

With lockdown easing, talk is turning to the economic crisis that could come in the wake of the coronavirus pandemic, and what decision-makers could do to alleviate it. But there are still victims of the last great recession - after the 2008 crash - that are yet to receive help.

Decisions around the way mortgages are bought and sold left many homeowners stuck with sky-high interest rates, no way to get them lowered and no money to repay them. Some are now at risk of eviction.

The All-Party Parliamentary Group (APPG) on Mortgage Prisoners has suggested capping lenders' standard variable rates (SVRs) as a way to help.

Here, Which? looks at the problems mortgage prisoners are facing and how these new proposals could make a difference.

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What is a mortgage prisoner?

A mortgage prisoner is a homeowner who can't get a lower interest rate through remortgaging. This is a huge problem for those whose rates have risen to a level they can no longer afford.

The Financial Conduct Authority (FCA) estimates there are 200,000 mortgage prisoners in the UK.

They're often customers of inactive lenders - sometimes called 'zombie banks' - that bought or were given existing mortgage loans from banks such as Northern Rock, which collapsed in the 2008 financial crisis.

These people are 'prisoners' because stricter affordability checks introduced in 2014 mean they can't go and get a mortgage from a different bank or building society.

How affordability checks keep people trapped

We've heard from several mortgage prisoners with interest rates of around 5%. If you had a balance of £200,000 left on your mortgage, with 25 years left to pay, that would mean monthly repayments of £1,170.

Lowering that interest rate to 2% - roughly the average for a two-year fixed-rate mortgage - would lower monthly repayments to £848.

Clearly, this is more affordable, but thanks to strict affordability rules, banks and building societies might tell you 'can't afford' that cheaper rate, even if you've been paying above that for years.

It's an unintended consequence of an important change. The 2008 financial crash was allegedly caused, at least in part, by lenders granting mortgages too liberally - in some cases without checking whether customers would be able to pay them back. So it made sense for the FCA to ask banks to make tougher checks.

What has been done to help mortgage prisoners?

The FCA has since made changes to these rules to help some mortgage prisoners escape. But campaigners say more needs to be done.

Being sold loans they couldn't afford was particularly an issue for interest-only mortgage customers, where homeowners just pay interest each month and then pay the full cost of their house in one go when their term comes to an end.

If they have no other means of paying, these people will be forced to sell their homes.

Which? spoke to one mortgage prisoner whose house fell into negative equity (it's worth less than it was when he bought it) during the course of his interest-only mortgage, meaning even if he sells it, he'll still owe thousands to NRAM - the inactive lender that owns his mortgage.

Will SVR caps work?

Unaffordably high SVRs are a key ingredient in the dreadful recipe for a mortgage prisoner.

If you're not familiar with SVRs, they're the interest rate your mortgage will end up having after the lower introductory rate expires. This will usually be after two to 10 years.

Unlike a fixed interest rate, lenders can change SVRs whenever they like. They're often tied to an external measure, such as the Bank of England base rate. But at the moment there's no limit on how high they can be.

The APPG is calling for a cap of 2% above the Bank of England base rate for all SVRs. With the base rate currently at 0.1%, this would mean a 2.1% cap.

If this cap was brought in, mortgage prisoners could end up automatically paying hundreds of pounds less, without having to pass affordability checks. It wouldn't necessarily 'free' all of them, but it would make life easier for thousands.

When could the SVR cap kick in?

Rachel Neale, founder of the campaign group UK Mortgage Prisoners, said:'The SVR cap should be brought in with immediate effect. The unfairness that we [mortgage prisoners] experience 12 years on shuts us out from the market that the rest of the country uses.

'We need a cap so that the rates are on a fair playing field and by doing this will put more money back in UK mortgage prisoners' pockets, enabling us to play our part in spending into the economy to help recovery.'

Seema Malhotra MP, co-chair of the group, said: 'Too many mortgage prisoners have been exploited by being held on high standard variable rates or have seen their rate increased with no justification.

'The CMA and the FCA should intervene quickly to cap the interest rates being charged. The coronavirus has led to unprecedented strain on family finances and we need to help mortgage prisoners, including many key workers, get a better deal.