The Financial Conduct Authority (FCA) has announced a long-awaited change of rules that will help to free thousands of households from the high interest rate mortgages in which they have been trapped for years.
Last year, the FCA estimated there to be around 30,000 ‘mortgage prisoners’ in the UK, and a further 120,000 home buyers tied to a mortgage because it was taken out with a firm that is no longer authorised to offer mortgage lending. Some of these households were formerly customers of Northern Rock and Bradford & Bingley.
Many of the mortgage borrowers had taken out a mortgage prior to the 2008 financial crash, when their homes lost tens of thousands of pounds in value virtually overnight, making it impossible to sell the property.
Stricter affordability criteria were introduced within the mortgage lending industry in 2014, including the EU’s Mortgage Credit Directive, which left these home buyers unable to switch their mortgages to a cheaper deal, despite being up to date with repayments.
It is estimated that around 10,000 of the 150,000 home buyers who are considered to be mortgage prisoners have mortgage deals locking them into their current arrangements, even though their lender is still actively operating within the mortgage market. It was announced last year that borrowers known to be in this situation would be contacted by their mortgage lenders by the end of 2018 to make it possible to switch their mortgage arrangements to another deal – albeit locked into borrowing from the same lender.
To qualify for assistance under these arrangements, the home buyer first had to be: a first charge owner-occupier; an existing borrower of an active lender; on a reversion rate; looking for a like-for-like mortgage; and up to date with payments. They also had to have a minimum remaining mortgage term of two years and an outstanding loan amount of at least £10,000, and benefit from switching under the current regulations and the law.
Now, the FCA says it is considering the introduction of a new affordability checker that would enable the remaining 140,000 borrowers to switch to a deal that is easier to pay – if the cost of borrowing is lower than their current mortgage arrangement. The test would apply only to those applying to reduce the cost of their current borrowing, not those who were seeking to borrow more on their current mortgage.
The number of households locked into a mortgage deal has continued to rise, as new swathes of people experience changes in work circumstances, such as moving to zero-hours contracts or taking up self-employment. While these borrowers can continue to live in their present property under the terms of their current mortgage arrangements, the rules have effectively made it impossible for them to move house or change their current deal, unless they are able to fulfil the affordability criteria of their lender – leaving them in the ridiculous situation of being unable to afford a cheaper deal!
If you’re thinking of buying a new property, contact your local Property Surveying independent qualified Chartered Surveyor.