Officially 50,000 face Catch 22 of being a mortgage prisoner: real figure could be double
Borrowers with inactive firms are far more likely to be mortgage prisoners: there are 195,000 of them.
Of these, 66,000 may be able to switch, and 30,000 can’t switch, but the rate they’re on means they wouldn’t get a better deal anyway.
34,000 have missed payments and 18,000 are near the end of their mortgage, so they wouldn’t be able to switch anyway.
It calculates that this leaves 47,000 mortgage prisoners.
But those who missed payments or are near the end of the term, are still effectively trapped on expensive mortgages – putting the full number closer to 99,000.
The FCA released a report on mortgage prisoners yesterday: Mortgage Prisoner Review | FCA
Sarah Coles, personal finance analyst, Hargreaves Lansdown: “Almost 50,000 mortgage prisoners are still stranded on horrendously expensive mortgages, according to FCA figures, but the real number of people trapped is closer to 100,000, and they face a nightmare Catch 22.
“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% is bad enough, 3% of them are paying over 5%. 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.
“As more time passes, your problems don’t get smaller, but you get older. Almost twice as many people with inactive lenders are over the age of 56 (35.3%), and almost four times as many are aged 76 or over (2.1%). Having big outstanding balances at a later age makes the task of finding an alternative to switch to even harder.
Why they’re stuck – inactive lenders
“Most of these people got a mortgage before the financial crisis, and then when affordability criteria were tightened afterwards, they discovered they didn’t qualify for a new deal. Many of them have been stuck with the same mortgage ever since, or have been switched to the standard variable rate.
“Over the years, rules have been relaxed to help some of these prisoners, including being able to switch to a new deal with your current lender without the same affordability checks (as long as you’re not behind on payments). Unfortunately, this does nothing for those whose mortgage companies aren’t offering new mortgages any more. These tend to be called inactive or closed book mortgages. It’s these people that the report focuses on.
Why the number of people trapped is twice as high
“It calculated that out of around 195,000 homeowners with these lenders, 47,000 of them are mortgage prisoners. This is bad enough, but in reality, even more people are trapped.
“The cost of these mortgages mean that almost one in five people of those who are trapped, have missed payments (17%). The FCA has decided not to count the 34,000 people with a shortfall as additional mortgage prisoners, on the grounds that they wouldn’t be able to switch even if they were with an active lender, because of their debts. However, these people are real victims of being mortgage prisoners. The fact they’re paying sky-high rates makes it far more difficult to afford the mortgage, which is one reason why they’re struggling to pay.
“The figures also exclude another 18,000 people who are within two years of the end of their mortgage deal or have less than £10,000 outstanding – on the grounds that it may not be worth them switching at this stage because of the cost of doing so. However, these people are trapped on expensive deals, so they are still effectively prisoners. If you add those people back in, it takes the number of mortgage prisoners to 99,000.
What can be done?
“The 47,000 people the FCA classes as prisoners tend to be stuck because either they are on an interest-only deal and have less than 50% equity in their home, so they’re unlikely to be able to afford a repayment mortgage. Alternatively, their credit score may be too low to qualify: 20% of those with closed book mortgages already had impaired credit when they started out.
“The FCA is calling on lenders to be more flexible with borrowers who are close to meeting their criteria, which it estimates could help 6,000 of these prisoners.
“For those who still can’t remortgage, it hopes they will be encouraged to get help from debt charities or consumer groups on taking steps to make a switch more likely. This includes things like improving their credit score or paying down some of their interest only mortgage. Of course, both these things would be far easier if they were able to get a cheaper deal in the interim.”
Steps so far to free up prisoners
- In July 2018, banks committed to offering mortgages to their existing borrowers as long as they were up to date with payments.
- In October 2019, it allowed lenders to use different affordability calculations for trapped borrowers who weren’t behind on payments. New analysis shows this only helped 200 people switch.
- Inactive lenders had to contact customers by January 2021 to let them know about the rule change, and that it may be easier to swich now.
- From October 2020, active lenders don’t have to use affordability tests on borrowers in the closed mortgage books of a lender in the same financial group.