The Coronavirus pandemic has had financial implications for almost everyone.
For many, it’s meant that their incomes have taken a hit, with millions of workers furloughed and effectively now employees of the Government. If you’re self-employed, then you may not have been able to work at all.
But the chaos caused by the pandemic stretches into our household bills too, with thousands of mortgage borrowers condemned to spending even longer on terrible, overpriced deals than expected.
Freeing (some) prisoners
There are currently around 140,000 mortgage prisoners in the UK. These are borrowers who are trapped on their current, expensive mortgage deal, unable to move to a cheaper loan.
Often, these borrowers took out their initial mortgage with a lender that is no longer operating in the UK, like Northern Rock or Bradford & Bingley, lenders that hit the wall in the financial crash.
Their loans weren’t just written off though ‒ instead the loan books were sold onto other financial firms who manage the loans, but aren’t regulated to offer new deals. And unsurprisingly these firms crank up the interest rates, charging rates higher than you will typically see from active lenders.
The problem is that these borrowers are unable to switch to a new lender, generally because of new, stricter underwriting rules brought in by the regulators following the financial crash which force lenders to be much tougher when assessing whether a loan is affordable or not.
When it comes to mortgage prisoners, these tests simply go too far. These borrowers are up to date with their payments ‒ if they are shelling out £1,000 a month to the hedge fund that bought their loan, of course they could afford £700 a month with an actual, proper mortgage lender.
But if the strict tests aren’t passed, then they can’t move.
Moving the goalposts
Thankfully, last October the FCA tweaked its rules to allow lenders to be a bit more flexible when assessing the affordability of mortgage prisoners.
They were also given a deadline for contacting relevant borrowers who may be able to take advantage of these new assessments and therefore qualify for a new deal.
However, it wasn’t the most encouraging change. For example, the new, more moderate affordability tests are entirely voluntary. If a lender doesn’t want to apply them, they don’t have to.
There’s also the fact that only around one in 12 mortgage prisoners would actually be eligible for a new deal under these new rules. In other words, the vast majority of prisoners are still stuck on their expensive deals.
UK Finance, the trade body representing most of the nation’s mortgage lenders, said back in January that it was establishing a ‘working group’ to come up with ideas to help those other borrowers but it hasn’t produced anything as yet.
Moving the deadline
But now because of the effects of the Coronavirus pandemic, mortgage lenders have been given more time in which to get in touch with these mortgage prisoners and outline their switching options.
The Financial Conduct Authority (FCA), the main regulator, has extended the deadline by three months, admitting that with lenders sweeping vast numbers of products off the table since March, as well as having to take the hit of the 1.6 million payment holidays granted, they are “not yet in a position to offer new options for borrowers”.
In other words, while some of these borrowers may be able to take advantage of the breathing space offered by a mortgage payment holiday, the actual meaningful action of moving them off of these farcically expensive deals and onto something more reasonable will have to wait for another day.
Lenders already had a pretty generous deadline for this, but they now have until the beginning of December to actually ensure they have contacted any prisoners on their books.
Mortgage? What mortgage?
To be fair to the FCA, there is a certain logic to this.
There isn’t much point in a borrower receiving a letter from their mortgage lender outlining the potential benefits of switching to a new deal, only to discover that actually that lender isn’t offering any new deals at the moment.
But it’s dreadful that we have reached this stage, that it has taken this long for a little common sense to apply. These borrowers have done nothing wrong ‒ they took out perfectly legitimate loans, that they could afford, at a time when the market was rather generous with its practices.
And they have kept up those payments, even as their interest rates have been ramped up. The regulator has been far too slow to act in any meaningful way to an issue that has been causing upset and financial strife for years.
That its eventual attempts to help even a small portion of mortgage prisoners is now being delayed by a pandemic is bad luck, of course it is, but it’s also condemning thousands of households to being stuck on these deals for even longer, at a time when finances are already being stretched to breaking point.
I hope that in the circumstances lenders take a more understanding view of any missed payments during this lockdown period and don’t hold them against mortgage prisoners who should finally have a way out of their mortgage hell.
And let’s hope that despite the current uncertainty, that UK Finance working group is actually coming up with something that will help the vast majority of prisoners who are still trapped on terrible, expensive loans.