Recently, we at BDRC Continental have been taking a deeper look at this key tranche of the market, and have found that the effects are multi-layered.
Costs
Mortgage prisoners often have to pay more for their mortgage than ‘non-prisoners’. We estimate the median mortgage interest bill to be 50% higher for mortgage prisoners than that for non-prisoners. As a result, half of all mortgage prisoners find their mortgage ‘a burden’ against just one in three non-prisoners.
Brand sentiment
Mortgage prisoners are less satisfied with their mortgage product than non-prisoners. While half would take another mortgage with their current lender, this is low compared to the two in three non-prisoners who would borrow again from their existing lender.
Dynamics
The incidence of potential defectors among mortgage prisoners – borrowers who would like to move to a new lender over the next year or two – is twice the level seen among non-prisoners.
But if they really are imprisoned and cannot change lender, then this removes roughly two in five potential defectors from the new business switching stream, knocking a large hole in the volume of re-mortgage or mover business that would otherwise occur – a real issue for lenders that depend on these groups for their new business flow.
Added together, the effects above create a multi-layered web. An immediate financial impact on mortgage prisoners themselves could, in the longer term, morph into a societal impact in extreme cases where prisoners cannot cope with their payments.
Meanwhile, the mortgage industry is also impacted, with mortgage prisoners being less willing to buy again from their existing lender and creating a significant reduction in the mover and re-mortgager switching pool.
What could help to reduce these impacts? With time, there is hope that LTVs will fall when property prices recover. If lenders start to moderate their criteria, that too would help at the margins. For those trapped by a poor credit score, their personal economic situation is key.
All in all, however, it looks like it’s going to be a long sentence to serve; I don’t foresee the issue of mortgage prisoners going away any time soon.
Tony Wornell is director at BDRC Continental
