Helping out the UK’s ‘mortgage prisoners’

Thousands of people across the UK may be unable to switch their mortgage to one with lower interest rates. The FCA is now considering changes to its strict affordability criteria that have made it harder for homeowners to remortgage. Article by Nick Green.

The Financial Conduct Authority (FCA) has reported that there could be as many as 140,000 mortgage holders who are unable to remortgage onto a cheaper deal. The problem stems largely from the 2008 financial crisis, when many mortgage lenders moved their customers’ mortgages to third-party firms, whose unauthorised or inactive status now means that they cannot offer new mortgages to these customers.

Jackie Bennett, UK Finance’s director of mortgages, has highlighted the issue of the FCA’s Mortgage Credit Directive (MCD), introduced in 2014. The MCD means that mortgage holders must meet strict affordability criteria when applying for a new deal, and may also be preventing lenders from using the transitional arrangements they would have previously used to help these customers.

In her speech at the UK Finance Annual Scottish Mortgage Lunch on 8 March, Jackie said, ‘The FCA has signalled their willingness to consider a more relative affordability test for these customers, which they will consult on this spring. We await the details, but for those customers who do not want to borrow more, the lender is likely to be able to take into account payment history and whether the new mortgage cost is more affordable than the current mortgage cost. This will allow active lenders to offer remortgage products for customers of closed books.’  

Helping people to better mortgage deals

Jackie also emphasised that it will be up to active lenders whether they offer remortgage products to mortgage prisoners. In some cases there will be good reasons not to, for example where customers are in arrears or negative equity, or have run up other large debts. However, she highlighted that in most cases people remortgage to find a more affordable deal, so if people were able to afford their previous, more costly deal, there is little logic in denying them a cheaper one on grounds of affordability.

That said, there may be a range of other reasons why the mortgage holders themselves may not try to switch. Jackie explained, ‘Customers may have other reasons for not wanting to switch if they have a low balance or a short time left on their mortgage. That is why, alongside any changes the FCA makes, we believe government and the FCA should ensure that the FCA has sufficient powers to protect customers who can’t or won’t switch, particularly where the book owner is not regulated.’

The government has stated that it is the responsibility of the FCA to make sure mortgage prisoners are protected. MP Nicky Morgan, who chairs the Treasury Committee, has urged the regulator to take action quickly and not to ‘kick the issue into the long grass’.

What is the FCA doing about mortgage prisoners?

The FCA has announced a consultation on whether it is feasible to change its lending rules to allow mortgage holders to switch more easily to an active lender in order to get a better deal. The FCA’s chief executive Andrew Bailey admitted that the regulator does not currently have the data to accurately know the status of the UK’s many mortgage prisoners:

‘It is not currently possible to say who will or will not benefit from our rule changes. We are engaging closely with lenders and lender trade bodies to understand the extent to which firms may be interested in taking on certain customers, and how these options will be communicated to affected customers.’

If the FCA decides to bring in substantial changes, the next 12 months could see a lot of consumers looking to remortgage their properties.