A judicial review at London’s High Court will look at whether the FOS is right to probe a case relating to interest paid by one of Co-op’s MAS5 customers between 2009 and 2012.

Rachel Neale, lead campaigner for group UK Mortgage Prisoners, said it is “an important day for all MAS5 customers”.

The Co-op Bank’s closed book subsidiary MAS5 received the complaint in 2018 over the customer’s variable mortgage rate between 2009 and 2012.

Co-op believes the case should be time-barred. Usually, a customer needs to complain about a problem within six years of it happening. Customers can also complain within three years of becoming aware of the issue – or reasonably becoming aware of the issue.

In 2021 the FOS found that it did have the jurisdiction to consider the complaint, which prompted the Co-op to commence legal action.

A spokeswoman for Co-op said: “This judicial review is about whether or not the events complained of are within the FOS’s jurisdiction and not on the merits of the underlying complaint.

“The bank is satisfied that the historical variations were applied fairly and in accordance with the terms and conditions of the mortgage contract.

“As the hearing is today we cannot speculate on the outcome at this time.”

The case could potentially open the gate for more customers to complain against MAS5.

The All Party Parliamentary Group (APPG) on Mortgage Prisoners says that MAS5 increased the standard variable rate four times between 2009 and 2012, taking it from 2.99 per cent to 5.75 per cent.

The Bank of England base rate remained at 0.5 per cent during this period.

Earlier this year, Seema Malhotra MP, co-chair of the APPG on Mortgage Prisoners, said “The Financial Ombudsman’s investigator concluded that the SVR increases by Mortgage Agency Services No.5 (MAS5) Ltd were unfair and not in line with the terms and conditions of the mortgage. These unfair increases have had a devastating impact on customers.

“We hope that the Co-operative Bank will start living up to its ethical values and pay redress to the customers who have overpaid due to the misconduct. The FCA and the FOS need to intervene to protect these customers and stop MAS5 from dragging out these cases and causing more misery to vulnerable people. Many of these customers have serious health issues or financial problems.”

A decision in principle (DIP) pulled together for a client a couple of months ago has been run again more recently with the offer reduced by around £20,000, in one case seen by Mark Dyason, founder of Edinburgh Mortgage Advice.

The numbers and circumstances of the client are all the same, but in the meantime the cost of living so, inflation has hit nine per cent, and the Bank of England has nudged up the base rate.

Dyason said: “What happens to a 95 per cent LTV mortgage in two years’ time when they can’t afford the mortgage?”

Duty of care from brokers towards clients at the top of their borrowing limits is particularly pertinent in the current environment, he added.

“We help clients get a mortgage, but then make sure they can get rid of it [pay it off].

“For those stretching as far as they can go, there is a duty of care around long-term affordability and mobility. We need to make sure they don’t end up wanting to move and actually they can’t.”

Simon Cutler, director at Blackdown IFA, is worried that people may be left paying variable rates when they come off their fixed rates in the year or so if they can’t pass lenders’ affordability assessments.

He fears rising inflation and mortgage rates have created a “perfect storm”.

“Lenders’ affordability criteria assessments are going to be much more difficult for borrowers to meet when they come out of their current deals.

“Those coming out of fixed rates, could see mortgages costing them thousands of pounds more.”

Cutler said he is also talking to clients about how they can protect themselves, and where it may not be a good idea to overextend.

He added: “It’s a real risk, mortgage prisoners.

“I try not to remember the bad times, but I’ve worked through two or three really tough times.

“The combination of factors doesn’t look great.”

Dean Esnard, director at Magni Finance said the option for product transfers should help make sure most borrowers don’t end up on high variable rates.

He said: “When you do a rate switch you don’t go through an affordability check – providing you have maintained your mortgage payments.

“You are forced to stay with whatever your lender offers you, but normally the rates an existing lender will offer you are better or in line with the existing market.

“From what we’ve seen there is nothing to panic over yet. Rates have increased a lot but I think they will slow down.”

Lender reaction

Nationwide recently increased its Loan to Income (LTI) multiple to 6.5 for customers remortgaging on a like for like basis.

The lender said the move may go some way towards helping mortgage prisoners created by the higher cost of living and rates.

Brokers are hoping that the market will follow Nationwide’s lead and adapt to the changing climate.

Greg Cunnington, chief operating officer at LDN Finance, said: “Clients have been stress tested at much higher rates, typically the lender’s Standard Variable Rate  + three per cent, when taking out their original mortgage as part of MMR. As such, even though mortgage rates have increased the payments should be comfortably affordable as will still be much lower than these stress tested rates.

“However, mortgage rates have increased quite dramatically compared to two years ago, when a lot of people will have taken their current fixed rates.

“With increased costs for utilities and other living expenses, clients should be prepared for these increases to their mortgage rates and monthly mortgage payments as it is very likely that clients looking to remortgage at the end of their current fixed rate will be moving to a higher rate.”

According to the results of its financial year ending 31 March 2022, it received £900m in new applications, down from £1.2bn in 2020/21.

Over half, 54 per cent, of its loans were for first-time buyers, up from 48 per cent last year.

Arrears in its core residential book fell to 0.31 per cent from 0.43 per cent. This is lower than the UK Finance average of 0.77 per cent.

Profit before tax for the year was £23.2m, up considerably from £4.7m last year. It attributed this to strong net interest income, fair value gems, the release of residential mortgage provisions that grew during the pandemic, and a lower commercial impairment charge.

Helping borrowers through the crisis

West Brom predicts that the cost of living crisis will put a strain on many customers, so some could “temporarily find meeting their mortgage payments a challenge”.

It committed to doing all it can to support borrowers, adding that it “adopts a compassionate, fair and flexible approach towards borrowers who are unable to meet their payments”.

West Brom said that helping mortgage prisoners was a key focus, having introduced products tailored to this demographic in 2020.

Over the last 12 months it has extended its range and called on the industry to “work together with the government and regulators to find further solutions to help these borrowers”.

Jonathan Westhoff (pictured), West Brom’s chief executive, said: “Inflation and the cost of living crisis is not only at levels not experienced for decades, but it is being driven by everyday basics and necessities such as energy and food essentials. The pressure on incomes that become almost unavoidable will potentially mean that some may temporarily find meeting their mortgage payments a challenge.”

He added that the mutual will look to help its members “beyond having the financial strength to withstand even the most difficult of economic downturns – it is about supporting people to remain in their homes”.

“Beyond that, the future is all about continuing to develop our strategy to ensure the benefits of mutuality continue to accrue to our members and other key stakeholders,” he said.

West Brom’s group finance and operations director Ashraf Piranie to leave

The mutual announced that its group finance and operations director Ashraf Piranie would leave the firm as part of a “planned restructure” of its executive leadership.

As part of the restructure, the group finance and operations director role will no longer exist in its current form. Piranie subsequently told the board he did not wish to consider alternative roles within the new structure.

The mutual will therefore recruit a chief financial officer and Piranie will remain in his post until the appointment and aid in the transition period.

Piranie has worked at West Brom for the past five years. Before that he was deputy chief executive and finance director at Nottingham Building Society.

He was previously joint managing director and finance director for Islamic Bank of Britain, and Alliance and Leicester’s director of finance for the retail bank division.

According to a study by Lifetime Mortgage Gateway Logistics (LMGL), an estimated 400,000 homeowners in England and Wales are unable to remortgage or switch lenders as their leases are less than 75 years, which is generally too short to qualify for mortgage finance including lifetime mortgages.

The report continued that another 50,000 homeowners are expected to see their leases tick down below the 75-year mark over the next five years, putting them at risk of being denied a mortgage or a remortgage.

This will force them to extend their lease by 90 years which can cost tens or hundreds of thousands of pounds.

The cost of extending is unaffordable for most, and could put older borrowers at a disadvantage as extending their lease would help them access finance.

Mid-term lease devaluation

The LMGL added that mid-term lease properties devalue annually after the 80-year mark unless the lease is extended. As the mid-term lease shortens, it surrenders value, and the cost of the 90-year lease extension, paid to the freeholder, increases in approximate proportion.

This means that the leaseholder’s home loses value and will continue to do so every year, while the freeholder’s asset increases at the leaseholder’s expense.

This loss of value is a turn-off for mortgage providers that generally won’t provide lifetime mortgages to these leaseholders.

According to LMGL, the lease value as a percentage of freehold drops to around 22 per cent at the five-year mark.

Lease extension process ‘complicated and extremely expensive’

The lease extension process, also known as enfranchisement or the right to buy, is “complicated and extremely expensive” according to LMGL, especially for those who are retired and on fixed income.

However, without a lease extension, homeowners may be unable to access equity.

The problem is further compounded by the cost of living crisis, putting homeowners in a situation where their home is surrendering value to the freeholder, but they can’t remortgage and they can’t access equity that may be tied up in their property to meet any unexpected costs.  This traps them financially.

Statistics from specialist later life finance company, Key, show that 38 per cent of all their lifetime mortgages are used to refinance existing mortgages.  This is the largest single use of later life loans.

Guy de Jersey (pictured), director at LMGL, said the situation shouldn’t be ignored by leaseholders.

“If your lease has less than 75 years left to run and you don’t do anything about it, the reality is most mortgage lenders will not want anything to do with you, leaving you with no possibility at all of a lifetime mortgage,” he warned.

“While many homeowners may be living in properties worth £1m or more, very few people have that sort of money lying around.”

He said that it had launched LMGL this year to help homeowners of equity release age, living within a retirement fixed income and trapped with mid-term leases, to extend their leases, adding that for many it would be a “welcome option” to halt depreciation and boost income in retirement.

The charity has called on closed mortgage lenders to stop passing the rise onto potentially vulnerable customers.

A spokesperson for UK Mortgage Prisoners said: “Closed, inactive mortgage books do not cost more to service today than they did yesterday and nor will they cost more to service tomorrow. It is not a commercial decision being made by these mortgage servicers but an unfair and immoral opportunity to profiteer further from people who are already vulnerable and living in poverty and yet UK Finance and the Financial Conduct Authority do nothing to help those affected most.”

She added it is immoral of the financial industry to push interest rates even higher for customers who are already sat on inflated interest rates of 4.38 per cent and above and remain unable to remortgage away from closed book deals.

The FCA’s mortgage prisoner review suggests roughly 195,000 borrowers remain on closed or inactive lender books, however, research from Hargreaves Lansdown out this month suggested that the real number of people trapped is likely to be closer to 100,000.

The Intermediary Mortgage Lender’s Association (IMLA) executive director Kate Davies said of the review the “wide variety of circumstances” suffered by mortgage prisoners means it is not straightforward for them to switch to a new deal.

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.

The charity as a whole supports the Home Ownership Protection Enterprise (HOPE), which provides a negotiation and support service between banks and their customers with the ultimate aim of preventing home repossessions.

Funds raised by the charity go towards a hardship fund for those in immediate danger of homelessness, offer access for families unable to make payments for heating or food or with mental health support.

Donate to the UK Mortgage Prisoner fund here – and here is a link for homeowners affected by the issues in this news story.

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The “Polluter Pays” Bill uses the same principle as the law for contaminated land and would allow the government to pursue remediation and interim safety costs from responsible parties in the construction industry, such as developers and builders, rather than leaseholders or homeowners.

The bill divides buildings into two groups, those that did not comply to building regulation at the time of construction, and those that were compliant when they were built but are no longer compliant following Grenfell.

This means the bill does not have time limitations, unlike current law where people have six years from when the building is built to file legal action, which will allow more mortgage prisoners access to funds.

It also works in tandem with government levies and grants, which amount to £5.1bn, and permits emergency grants to those who are on the verge of bankruptcy.

Speaking to this publication, campaigner Steve Day, who is spearheading the bill, said: “Trust in building regulation has broken down. People don’t believe buildings are built safely, so what we are saying is instead of letting the construction industry off with a tax and levy that isn’t good enough for breaking building law, the responsible parties should be held liable.”

He said that this would benefit mortgage lenders as it would rebuild trust in building regulation and compliance and went on to say that it would eliminate the need for EWS1 forms.

It also does not class mortgage lenders, or other financial services, as polluters in its bill unlike other amendments which could seek redress from mortgage lenders.

Lord Greenhalgh, who is minister of state for building safety, leasehold, resilience and emergencies and communities, said in the House of Lords: “We are very aware of the Polluter Pays Bill and the work that is being done… This is something we are looking at very carefully to see if it would further enhance the Building Safety Bill.”

He added that it was already considering extending the legal action time limit from six years to 15 years, but the Polluter Pays Bill could provide further support to ensure that it is the polluter that pays remediation.

Industry response

The proposal has been greeted positively by the mortgage industry, but concerns have been expressed around how long this process will take to implement.

Robert Sinclair, chief executive of Association of Mortgage Intermediaries, said: “This proposal to resolve the issues on funding the remediation of buildings with unsafe cladding would be a significant step forward to resolving the problems facing residents. However, it will still take time particularly if ministers fail to grasp the opportunity and support these amendments.

He added: “Whilst these proposals are welcome it will take some time to avoid the need for EWS1 forms and too long to resolve the structure of many high-rise buildings. It is right that government should be funding all replacement and repairs and then recovering the cost from those they deem responsible – rarely those who currently occupy the properties.”

The Intermediary Mortgage Lenders Association’s chief executive Kate Davies said that these latest proposals could lead to “meaningful progress” to the cladding crisis.

She said: “By shifting the balance and making developers front building remediation costs, we can hold those who failed to properly construct these dwellings to account, remove the cost burden currently unfairly placed on individual homeowners, and speed up the process of remedying unsafe homes.

“This isn’t going to be a perfect solution and there will be instances where building developers cannot be found to front the costs, especially where they are no longer in operation, but it would be a step in the right direction. Any initiative that helps to ease the immediate dilemma for borrowers and gives mortgage providers the reassurance to lend on safe properties, should be welcomed.”

Government response

A Ministry of Housing, Communities and Local Government spokesperson said: “Our priority is making sure residents are safe and feel safe in their homes by removing dangerous cladding from the highest risk buildings as quickly as possible backed by over £5bn.

“We have been clear throughout that owners and industry should make buildings safe without passing on costs to leaseholders – and we will ensure they pay for the mistakes of the past with a new levy and tax to contribute to the costs of remediation.”

A cohort of willing brokers signed up with the FCA to help mortgage prisoners, in an initiative last summer where a letter was sent out inviting the borrowers to contact an adviser to review their options.

Ray Boulger, senior mortgage technical manager at John Charcol, said: “The question is, why didn’t more people come forward? It could be there’s not much benefit to them of doing so. Particularly for those who’ve been paying down repayment mortgages, the loans may be fairly small and so the benefit of a lower rate is smaller.”

About 80 per cent of mortgage prisoners are thought to be on rates of about four per cent.

The advisers signing up to the initiative agreed to offer fee-fee advice, and to provide data to the FCA on numbers of inbound calls received, fact finds conducted and applications submitted.

The number of borrowers contacting brokers were relatively small, while the proportion overall who have remortgaged or transferred is thought to be in the low teens.

“We need detailed research for a significant proportion of mortgage prisoners, to make it clear how many could get a useful benefit from remortgaging or, because of the size of the loan or credit situation, they would not do,” said Boulger.

He added it was surprising the situation had gone so far without the FCA having this information. “If you’re trying to help mortgage prisoners, obviously you need to understand who they are,” he said.

Long shadow

The FCA has classed about 250,000 borrowers as mortgage prisoners. The regulator will now further investigate their characteristics to understand what actions may be helpful.

Additional economic challenges arising during the pandemic are thought likely to see the number rise.

Charlotte Nixon, proposition director at Quilter, said: “It’s clear the FCA has good intentions to do the right thing by customers, but unless lenders can be more flexible, there is not much more we can do in the broker space.”

She said lending criteria had tightened during the pandemic.

“Of course lenders have their own risk appetite. But they are being picky at the moment, especially with first-time buyers and the self-employed,” Nixon said.

“We need to support customers who borrowed according to the rules before the financial crisis. During the early stages of the pandemic, we took our hats off to lenders as they made changes overnight to support borrowers. This now risks casting a long shadow over the sector,” she said.

Key Mortgage Advice, which offers options for older borrowers who may be eligible for retirement interest-only (RIO) or equity release, also welcomed the FCA’s next steps.

“The review of existing measures is important. With a significant cohort of mortgage prisoners being older borrowers, it is particularly frustrating to know that with the right specialist advice many may be able to benefit from a RIO or equity release mortgage, which might better meet their needs.

“We need to push forward and help these borrowers achieve the right outcome for their individual circumstances,” he said.

The review aims to improve the data available about mortgage prisoners and to assess the effectiveness of two interventions that were supposed to have helped the trapped borrowers.

On data, the FCA and Treasury will collaborate to produce new information with more detail on the demographics and loan characteristics of mortgage prisoners. They will make use of latest product sales data and credit reference agency data.

The FCA will also review how it has produced figures saying how many mortgagees with inactive firms are unable to switch despite being up-to-date with payments. It admitted that July 2020 assumptions led to “a low estimate” and that use of latest data – including taking account of economic shifts during the pandemic – would likely result in a higher number.

As to interventions, it will review the effects of two interventions, namely modifying affordability assessments and a rule change on intra-group switching.

Gearing up

The affordability change review will look at take-up of resources and support from mortgage brokers who have agreed to provide advice to mortgage prisoners, and will consider Money and Pensions Service and FCA product sales data. 

The regulator will also look at the extent of borrowers switching within lending groups.

The review is happening from July to October, with stakeholder engagement expected in July and August. 

The resulting report to Treasury will be put before Parliament by the end of November.

Rachel Neale, lead campaigner at UK Mortgage Prisoners, said: “Looking into the characteristics of mortgage prisoners is a way to victimise us, saying we are people who shouldn’t have borrowed what we did or how we did it. 

“These products were regulated by the FCA. And anyway, it was not the products that landed us in this mess. It was a failure by Treasury to put in place adequate protections when it sold the mortgage books.”

The group was grateful to be invited by FCA to participate in stakeholder discussions, but feared the review would be the latest in a series of moves by Treasury “to kick the can down the road,” Neale said. 

“Nothing will happen until at least next year. This is winding down the clock until people lose their homes, come to end of term, or die,” she added.

The challenge for self-employed applicants drew readers’ attention too, while rising house prices, combined with the latest potential fix for mortgage prisoners, from Prestbury’s former boss, revealed the complicated client landscape which brokers are presently asked to navigate. 

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