28Nov

The London School of Economics has called for additional steps to be taken to assist mortgage prisoners. These are borrowers who might have mortgages with lenders who are no longer active, such as Northern Rock and Bradford & Bingley, and where the mortgage books have been sold to investors rather than to active lenders. The borrowers could theoretically re-mortgage to active lenders but have been unable to do so as they wouldn’t satisfy the stringent affordability tests that now apply, even though the monthly repayments might be lower than what they are currently paying. 

The LSE is now calling on the Government to step in and help an estimated 250,000 people who are affected by this issue. It says mortgage prisoners are 40% more likely than other mortgage borrowers to default on payments as a result of Covid-19 issues. 

The LSE report makes six recommendations: 

  1. Allow borrowers to access government-backed equity loans. Some mortgage prisoners are unable to access new deals as they do not have sufficient equity in their homes 
  2. Allow for the decoupling of products such as Northern Rock’s Together loan, which allowed people to borrow more than the value of their property. They might for example have received a mortgage for 95% of the value and an unsecured loan, with the same interest rate and term, for another 30%.  The two elements are contractually linked, so borrowers can’t re-mortgage the secured element without triggering a large rate rise on the unsecured element. LSE suggests Government equity loans could be used to repay the unsecured element 
  3. The investors who have bought some of these mortgages could be encouraged to write off parts of the loans, with government incentives to do so 
  4. If the mortgages are genuinely financially unsustainable, the borrowers could sell the property to a housing association and be allowed to remain as tenants. They could have the option to buy their homes back in future if their circumstances improved 
  5. The Financial Conduct Authority should regulate all closed book mortgage owners 
  6. The Standard Variable Rate on closed book mortgages could be capped 

Kath Scanlon, Distinguished Policy Fellow at LSE London, said:  

“The Government took measures after the global financial crisis to make mortgage lending less risky, but these policies also contributed to locking some borrowers in to their existing lenders. The situation has caused real harm for many affected borrowers, yet UKAR and FCA policies to address the problem help only a small minority. And now coronavirus is making the situation much worse. 

“Our research aimed to understand the range of circumstances facing mortgage prisoners and identify solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their home, and we found a strong case for fully investigating a wider variety of solutions. We hope our work contributes to a long-lasting solution for these borrowers.” 

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed by Scott Robert and as such are not updated. Please be aware of the facts, circumstances or legal position may change after publication of the article