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FCA to consult on ‘proportionate’ affordability test to help mortgage prisoners switch

  • 10/01/2019
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FCA to consult on ‘proportionate’ affordability test to help mortgage prisoners switch
The Financial Conduct Authority (FCA) has revealed it will launch a consultation into changing affordability assessment rules for mortgage prisoners.


The regulator has come under increasing pressure to act on the issue and in November admitted that it made ‘no sense’ for affordability rules to deny mortgage prisoners a cheaper deal.

Around 140,000 homeowners are understood to be mortgage prisoners trapped on standard variable rates (SVRs) with inactive or unauthorised lenders who are unable to move to another lender.

Many mortgage prisoners originated from mortgage books the government took over during the financial crisis, including Bradford and Bingley and Northern Rock.

This has led to many paying far more in mortgage costs than they would otherwise have needed to, with strong criticism aimed at the government and the firms which it sold the mortgage books to.


Relative affordability test

In a letter to the Treasury Select Committee, FCA chief executive Andrew Bailey (pictured) said: “We want to remove potential barriers in our rules to these customers switching to a cheaper mortgage.

“To help these customers, we will consult on changes to our responsible lending rules, with the aim to deliver a more proportionate affordability assessment.

“We intend to move the affordability test to a relative test. Thus, the test would be whether the new mortgage costs are more affordable than current mortgage costs.

“Our focus will be on those customers who are seeking to move to a cheaper mortgage and are not borrowing more to ensure that a new mortgage is more affordable for these customers,” he added.


Not everyone will benefit

Bailey noted that there appeared to be willingness within mortgage lenders to offer products to these customers should it be commercially viable.

However, he warned that it was likely not all customers would benefit, particularly those with arears, very high loan to value mortgages, other considerable debts, or mortgages in negative equity.

“It maybe that we see a two-tier approach, with the larger lenders offering a choice to those with the simplest needs, for example those with a repayment mortgage not in arrears, and a range of more specialist lenders able to manually underwrite more complex cases,” he continued.

“Over the coming months we will work with firms and trade bodies on the practicalities of remortgage options and how these will be communicated to affected customers.”

The consultation to remove regulatory barriers to switching for these customers will be published

alongside the final report of the Mortgages Market Study this spring.


Do not kick into long grass

The move was welcomed by Treasury Select Committee chairwoman Nicky Morgan but she said she will keep the pressure on the FCA to ensure this is completed quickly.

“These customers are trapped on a far higher interest rate than is necessary through no fault of their own,” she said.

“The FCA has today announced that it will consult on changing its lending rules to allow such customers to switch to an active lender, with whom they may be able to get a better deal.

“The regulator must now act swiftly to help these 140,000 mortgage prisoners, and not use this consultation to kick the issue into the long grass. We will raise these issues when we take evidence from the FCA next week,” she added.


Need to remove barriers

In an earlier interview with Mortgage Solutions published today, UK Finance director of mortgages Jackie Bennett, agreed there was need for strong regulator and government action.

And she added that “there are definitely a number of lenders who are willing to offer products to some of these customers.”

Responding to today’s announcement, Bennett welcomed the FCA’s move as a positive step.

“The FCA has noted the progress made through the industry’s voluntary agreement to help borrowers with active lenders switch to a better deal,” she said.

“But it has also recognised that regulatory changes are needed to remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders.

“We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily,” she added.



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