The FCA released its mortgage prisoner review yesterday and said that there were around 195,000 mortgages on closed or inactive lender books, but only deemed 47,000 as mortgage prisoners.
However, research from Hargreaves Lansdown said that the real number of people trapped is closer to 100,000 and they face a “nightmare Catch 2022”.
There are 195,000 borrowers with mortgages on the books of inactive firms, and they were more likely to be mortgage prisoners as tightening affordability rules post-financial crisis means it may be more challenging to switch to another lender.
Within that, 66,000 may be able to switch to a different and less expensive deal, whereas 30,000 can’t switch and are stuck on a higher rate.
Around 34,000 people have missed payments and 18,000 are within two years of their mortgage deal ending or have less than £10,000 outstanding, so will be unable to switch as it would be expensive to do so.
According to Hargreaves Lansdown, this means that there are around 99,000 mortgage prisoners as it said those who have missed payments and are near the end of their term are effectively mortgage prisoners.
The FCA has called on lenders to increase flexibility to those borrowers who are close to meeting their criteria, which it predicts could help 6,000 mortgage prisoners.
Sarah Coles, personal finance analyst at Hargreaves Lansdown said: “Prisoners are trapped in a vicious circle. They’re often paying a far higher interest rate than everyone else, and while the average rate of 4.3 per cent is bad enough, three per cent of them are paying over five per cent.
“It means they’re completely focused on making ends meet, so tackling their underlying problems becomes a Herculean task. If every penny is going on your existing mortgage, it’s harder to pay down a big outstanding interest-only balance. Likewise, if it absorbs a major chunk of your income, you run the risk of missing payments. And both of these things make you more likely to remain a prisoner for even longer.”
She added that almost twice as many people with inactive lenders are over the age of 56 and four times as many are aged 76 or over. She explained that having outstanding balances at a later age made switching even more challenging.
Varying circumstances
One of the key issues with mortgage prisoners is they have a “wide variety of circumstances”, so it is not straightforward for them to switch to a new deal, according to Intermediary Mortgage Lenders Association’s executive director Kate Davies.
She said: “We know from the findings that of the estimated 195,000 borrowers who have mortgages in closed books, there are many different types of cases. Some may be able to switch to a new product with the right support, but others either won’t be able to do so, or the benefits of switching would not be sufficient to justify doing so. Other borrowers’ finances may be in a poor state, in which case the regulator’s rules would not allow a new lender to approve a new deal for them.”
She added that whilst the FCA report provided great analysis of the issue it “does not push us closer to a solution” for these mortgage prisoners.
She explained: “Already many of these borrowers have been contacted by mortgage providers with help and guidance about their options.
“Unfortunately, this contact has frequently been met with silence. The key now is to encourage those who are able to benefit from a switch to a new mortgage to take action, by engaging with a mortgage adviser to explore the product options that are available and put a financial plan in place.”
Government, lenders and brokers need to take action
Nick Mendes, mortgage technical manager at John Charcol, said data needed to be shared and the FCA needed to be open about the households and individuals affected, as well as the rates they were currently on.
In addition, Mendes said the regulator should “work in collaboration on new ideas to support lenders” and suggested that a government scheme for these kinds of customers could be “feasible”.
He pointed to government schemes such as Help to Buy, Help to Build and the mortgage guarantee scheme as examples of the government stepping in to support homeowners.
From a lender perspective, Mendes said more lenders needed to come to the table, with help from government, with increased options to allow customers to raise money to remortgage away from these expensive deals. He posited longer-term fixed rate, like Kensington Mortgages’ 40-year fixed rate deal, as a possible example.
He said: “We cannot rely on the same lenders to accept mortgage prisoners; more lenders will mean more options from criteria, through to rates to allow more opportunities to help mortgage prisoners.”
He added that brokers needed to treat clients in this position with “more care and understanding” and understand lender’s appetite for these kinds of clients.
He explained: “As brokers we encounter a range of clients, many of whom may not meet a lenders’ criteria. So, it is important that feedback is provided. Many lenders will listen to what a broker has to say and if there is an opportunity look to support.”
