The Financial Conduct Authority (FCA) has confirmed its new rules designed to assist ‘mortgage prisoners’ – borrowers who cannot re-mortgage to a cheaper deal. A consumer might become a mortgage prisoner for a number of reasons:
- Their original mortgage was granted before more stringent affordability requirements were introduced in the FCA’s Mortgage Market Review (MMR), meaning that they would fail the affordability assessment if they applied for a new cheaper deal
- They have a mortgage with a firm that no longer accepts new business
- They have a mortgage with a firm that is not authorised by the FCA
In 2018, the FCA acted to protect the 10,000 mortgage prisoners who were with lenders who were still active – at that time the FCA requested that lenders write to their mortgage prisoners highlighting which of their mortgage products the individual may be eligible to switch to.
The latest proposals from the FCA go one step further and are designed to assist some of the 140,000 or so mortgage prisoners who fall into the latter two categories from the above list. These customers can now apply to a new lender for a re-mortgage, and the lender can then accept their mortgage application if the payments are lower than on the existing mortgage, even if the applicant would not normally pass the lender’s affordability assessment.
The key measure lenders should use here is the total payments during the initial offer period. For example, if a 20-year mortgage had a five-year fixed rate period in which payments were £500 per month, then the total cost is £6,000. If a customer whose previous mortgage involved payment of £7,000 during a five-year fixed period, then should they apply to a new lender that firm can accept their application without needing to carry out the usual comprehensive affordability testing required under the MMR.
A second requirement is that the new mortgage must have a monthly payment that is lower than the monthly payment paid in every one of the last 12 months under the current mortgage.
Inactive lenders and administrators acting for unregulated entities must now write to any customer who might meet the definition of a mortgage prisoner and inform them of the new rules and how switching lender might benefit them.
The new rules only apply to customers seeking a re-mortgage on their existing property and do nothing to assist individuals who wish to take out a mortgage in order to move home. The less stringent requirements also cannot be used where a borrower is seeking to raise additional capital via a re-mortgage, say for debt consolidation and home improvements.
Customers who want to add broker or lender fees to the loan can still do so – for example a customer with a mortgage balance of £30,000 can still re-mortgage under the new rules if they borrow £30,995 and where £995 in fees is added to the loan amount.
Another group of customers who will not benefit from the rule change are those with interest-only mortgages, as to re-mortgage to a capital repayment arrangement will almost always result in payments increasing. Any customer who has missed one or more payments within the previous 12 months cannot make use of the new arrangements either.
The new rules came into force immediately when the FCA issued its Policy Statement in October 2019.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article