The Financial Conduct Authority (FCA) has announced new proposals to assist ‘mortgage prisoners’ – borrowers who are up-to-date with their payments but who still 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, 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

The issues concerning the 10,000 mortgage prisoners who were with lenders who are still active have already been addressed, as in late 2018 they should have received a letter from their lender highlighting alternative mortgages offered by the same lender that they may be eligible to switch to.

The latest proposals from the FCA are however designed to assist the 140,000 or so mortgage prisoners who fall into the latter two categories. The regulator has indicated that it is happy for lenders to adopt a more ‘proportionate’ approach to assessing mortgage affordability where a customer is up to date with their repayments and is not seeking to increase the amount borrowed. Essentially the ‘proportionate’ test would require the lender to ensure that:

  • The customer has maintained their mortgage payments throughout the previous 12 months, and
  • The re-mortgage would lead to them paying lower interest rates and monthly repayments, at least during any initial ‘offer period’

There will be no need for lenders to apply the same affordability criteria as they would to new purchasers, and there will be no need to carry out stress testing on mortgage prisoners either. Stress testing requires lenders to ensure that prospective borrowers would still be able to afford their repayments were interest rates to rise.

However, the FCA proposals do acknowledge that some mortgage prisoners will be too ‘high-risk’ for the more relaxed rules to be applied. These include those who:

  • Are not up-to-date with repayments
  • Have a mortgage that represents a high proportion of the property value
  • Are in negative equity

Additionally, the proposals do not do anything to assist any mortgage prisoner who might want to re-mortgage for a higher amount for any reason, for example because they require additional funds for home improvements or to consolidate other debts.

The new rules will also require inactive lenders and administrators of entities not authorised for mortgage lending to contact customers who might meet the definition of a mortgage prisoner, and to inform them that they may be able to re-mortgage to a more beneficial arrangement with an active lender.

The FCA consultation on the proposed new rules ends on June 26, and the regulator will publish final new rules in a Policy Statement in late 2019.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

“We are particularly concerned about consumers – who are commonly referred to as mortgage prisoners – who are currently unable to switch. That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage.”

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