These amendments meant that lenders were no longer able to apply the transitional rules – which disregard the need for certain affordability assessments on pound-to-pound remortgages – to new customers, forcing borrowers to remortgage with their existing provider.
This week we’ve asked our panel whether the issue of mortgage prisoners is still a prevalent one. If so, how are mortgage brokers helping these clients and what sort of products and services are helping to remedy the issue?
Gemma Harle, managing director of Tenetlime, worries that as regulation becomes tighter, more of these so-called mortgage prisoners are being created in other sectors of the market, namely buy to let.
David Copland, director of TMA Mortgage Club, says while the issue of mortgage prisoners has not received as much press coverage lately, the problem has certainly not dissipated.
Dominik Lipnicki, director at Your Mortgage Decisions, sees this not only as a problem limited to borrowers with a less than perfect credit history; but with the self-employed, older borrowers and interest-only customers also at the mercy of more restrictive affordability rules.
It is difficult to accurately assess the scale of the mortgage prisoner situation from an intermediary perspective, as brokers generally do not record such information.
However, according to AMI, there are an estimated one million UK consumers who could claim to be trapped in a mortgage they cannot get out of.
Stricter affordability checks as a consequence of the MMR are undoubtedly a good thing, as providers need to ensure that homeowners are only taking on debt that they can afford in the future. And the new ‘transitional arrangements’ are there to help – but still many borrowers find themselves locked into SVRs with comparatively high interest rates.
Particularly disadvantaged are those on interest-only mortgages, the self-employed and contract workers, thanks to a combination of the new affordability rules and the instinctive commercial bias of lenders.
Buy-to-let customers are also becoming more vulnerable, as since part of this sector became regulated, they have been left with virtually nowhere to go. This has been exacerbated by the fact that most buy-to-let mortgage lenders now require the rental income to cover 145% of the amount of the monthly mortgage payment (up from 125%) and many lenders have pulled out of the newly-regulated arena.
The introduction of the 5% stress test is also likely to lead to many existing buy-to-let borrowers being unable to move lenders or obtain alternative deals when their current fixed rates come to an end.
So who can these ‘prisoners’ turn to for a solution? Mainstream lenders do not appear to be falling over themselves to promote a solution, but some smaller building societies, such as Furness and Leeds, are creating a niche thanks to their more flexible criteria.
Equity release is also rising to prominence as a potential alternative, especially for customers in the 50-plus age bracket who are increasingly seeing it as a logical means of clearing off looming interest-only obligations.
MMR and the current record low interest rates would appear to have combined to create a problem, but as yet, there are no bespoke remedies. Perhaps then, it is not as big an issue as some would have us believe?
Ensuring people can afford their mortgage is crucial. Recently, affordability checks have rightly become more stringent; they are now designed to see if a borrower can afford a mortgage even if interest rates unexpectedly rise.
However, even when remortgaging on a like-for-like debt basis, lenders have to test affordability. Ironically, therefore, mortgage holders living in the same house and not borrowing more could be prevented from switching – even if the monthly payments would be less.
While we have not seen as much coverage in the news recently, ‘mortgage prisoners’ have not disappeared. Not only is it still a problem in the residential market, we are increasingly likely to see it in the buy-to-let space too. Mainly because I expect some lenders will refuse to take on remortgages from other lenders, even though the PRA’s recent policy and supervisory statement will allow them to do so.
The question that needs to be answered is why are there still so many mortgage prisoners who are unable to switch? For one, the ambiguity of product transfer fees is making things difficult for brokers and borrowers alike.
As some lenders don’t offer borrowers looking to switch the same commercial rates on offer to new customers, people are unaware they are losing out by staying with the current lender. Today, this is being made worse as a selection of lenders are cherry picking the borrowers they wish to retain and not offering competitive rates to other borrowers already on their books.
Brokers need to make sure the lenders they are dealing with have a product transfer system in place, and know how it works.
For instance, a broker must ask: when does the lender contact the client to facilitate the transaction? Does the lender offer the new commercial rates as opposed to a different set of products that could be better or worse than the new commercial rates?
Virgin and Barclays are good examples of lenders who work in true partnership with the intermediary community, committed to offering a competitive product transfer policy that should achieve great customer outcomes.
When advising a new customer, look for ways to help avoid them becoming a mortgage prisoner, collect the soft facts and, if nothing else, look at the lender’s track record on their revert rate. Some lenders have a revert rate that is linked to a third party index like bank base rate or the LIBOR rate, however, in most cases it is just the SVR.
Finally, don’t just compare the best product over a two or five-year fixed period. Look at the underlying variable rate of the product and what they do with straight forward product transfers. This would give you the best chance of freeing those stuck on uncompetitive rates.
Despite the regulator’s desire to ensure that mortgage prisoners are looked after, many face huge problems when trying to refinance their mortgage scheme.
Borrowers who could easily get a deal before the 2008 crash, all too often now fall outside of the lender’s criteria. Some banks and building societies are all too happy for these clients to remain on an expensive Standard Variable Rate, sometimes refusing to offer the stability of a fixed rate deal, which many clients would seek to ensure that their mortgages are affordable.
The problem is not just adverse credit history. We are seeing borrowers who are now mortgage prisoners due to age, interest only borrowing or irregular/hard to prove income.
The industry has rightly improved from the pre-2008 days and none of us would desire the return of self-certification mortgages or lending to clients that clearly cannot afford the borrowing. Lenders however, must surely have a responsibility to look after clients that they were all too happy to lend to in the first place.
As mortgage intermediaries, we are best placed to help mortgage prisoners find a new deal when their own lenders are not interested. After all, we have the expertise as well as the lender access to give all borrowers the best chance of being placed and take advantage of these record low mortgage rates.