By Paula Mercer, Head of Sales at LendInvest
You may have seen the term – ‘mortgage prisoner’ hit your inbox recently, and this topic has been a rising concern for the FCA.
Why is this?
The subject has been discussed in the House of Commons and recently the London School of Economics published a report, identifying the problem, collating the data and providing solutions.
What is a mortgage prisoner?
Many definitions of a ‘mortgage prisoner’ float on the surface, but most follow the same structure. It’s important to know the difference, and understand why it’s commonly debated on.
The FCA’s definition:
“Generally speaking “mortgage prisoners” are people who are unable to switch mortgages to a better deal, even if they are up to date with their payments.
“Most mortgage prisoners have a mortgage in a closed book of an inactive firm. This means that the mortgage is held with a lender that can no longer make mortgage contracts because they are not authorised to do so.”
However, this does not include mortgage owners who are free to move their mortgages but hadn’t done so, unlikely to benefit from doing so, or not up to date with their payments so would not in any case be eligible to move.
The LSE definition:
“We define mortgage prisoners as borrowers who; have residential mortgages with a firm that does not grant new loans (closed books), and do not meet, or are unaware that they meet, standard eligibility criteria for remortgaging with another lender.”
What does this mean for the housing market?
The sharp increase in rates in the past year means there will be an increased number of mortgage prisoners who – through no fault of their own – are locked on variable rates because they can’t refinance onto another fixed term rate.
This is because changes in interest rates and lender criteria have affected their affordability. Putting it simply: the monthly cost of paying their mortgage has risen a lot, and their salary hasn’t increased to keep up with it, therefore a lender won’t give them a mortgage even if another did two or five years ago.
This is – of course – immensely challenging for the homeowner who, during a cost of living crisis, can face sharply increased mortgage payments with no visible path out of it.
What can mortgage advisers do to stop the cycle?
One – getting in touch early. Having conversations with your customers whose initial term may be ending in three to six months time can give you a headstart on helping sculpt their exit.
Acting early can protect borrowers against volatile rates, locking in cheaper rates now before they go up, or giving them the option to change rates on to a cheaper one in 6 months time.
If there are problems around affordability, establishing these early helps you both find solutions much earlier in the process.
Two – understand the options available. If your customer is struggling to find a mortgage due to affordability, it’s common that downsizing is the go to approach. As this means less income is needed to fit the eligibility criteria of the forever changing market.
Three – get to know your specialist lenders.
How can lenders help?
It’s most important that lenders alike do not contribute to this growing problem, and provide solutions to enable less mortgage prisoners (by the FCA definition) each year.
Structuring products around affordability above all else is paramount, as well as giving borrowers the tools to maximise their income in criteria, for example: No minimum income for interest only products, 100% of benefits included in income and calculating affordability on a self-employed individual’s last job.
These tools allow brokers and lenders to be flexible with their range.
Alternative funding is also an option, such as regulated bridging, when tested for affordability and a clear exit strategy, to act as a short-term solution for borrowers trying to swap lenders.
Again the point around exit and affordability remains, so while giving borrowers now a flexible solution to ease their pain, lenders can’t create a situation that puts them back in a mortgage prison when this term ends.
Understanding mortgage prisoners – where they come from and what they need – will sadly be increasingly important for borrowers and brokers as more homeowners remortgage in this high-rate environment.
Taking active steps to suppress the trend and support consumers is incumbent on everyone involved in lending.
LendInvest Loans Limited is a company registered in England & Wales with Company No. 09971600.
LendInvest Loans Limited is authorised and regulated by the Financial Conduct Authority (FRN:737073). LendInvest Loans Limited is a wholly owned subsidiary of LendInvest plc.
Borrowing through LendInvest involves entering into a mortgage contract secured against property. Your property may be repossessed if you do not repay your mortgage in full.