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What’s being done to help mortgage prisoners?

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Thousands of people – so called ‘mortgage prisoners’ are currently trapped in their mortgage, paying a high rate of interest. What help is available and what can you do if you’re one of them?

What is a mortgage prisoner?

The term ‘mortgage prisoner’ is most often used to describe people who can’t switch to get a better deal on their mortgage (either with a different mortgage lender or their existing mortgage lender). It’s often due to a combination of their own circumstances changing and the financial regulator tightening up the mortgage rules a few years ago.

There’s a specific group of mortgage prisoners who are unfairly penalised by this – namely borrowers who were originally with lenders like Northern Rock, and whose mortgages have been sold on. The interest rates they’re now paying are much higher than they’d be charged if they were with a ‘standard’ lender.

Mortgage prisoners fall into several categories:

  • Some borrowers are repaying their mortgage on an interest-only basis.
  • Some borrowers are in negative equity, where the value of their mortgage is more than the value of their home.
  • Some borrowers have products that combine a mortgage with a personal loan. Northern Rock used to offer a ‘Together’ mortgage, which lent 125% of the value of the property, with part of this being on a personal loan basis.
  • Some borrowers are in arrears or have been recently.

What’s the problem?

The problem is that these borrowers’ mortgages have been sold to non-regulated lenders. The mortgages haven’t been sold to another bank or building society that offers mortgages, but to private equity companies. These often charge higher interest rates and don’t offer competitive mortgage deals (because they are not competing for new customers).

How many people are affected?

It’s estimated that around 150,000 borrowers are ‘mortgage prisoners’. A couple of weeks ago, the financial regulator, the Financial Conduct Authority said it would relax the rules so that mortgage lenders could make it easier for mortgage prisoners to remortgage. However, the FCA estimates this will only help a few thousand people.

The new rules mean that mortgage lenders won’t have to include all the checks that they normally would when someone wants to remortgage. However, these would only apply to people who have a mortgage and who:

  • Are not in arrears with their current mortgage (and haven’t been in the last year).
  • Do not want to borrow more.
  • Want to remortgage on their current property.

How much interest are they paying?

The interest rates people who are mortgage prisoners are being charged varies. Some people are paying a little over 5%, but others are paying much more. I’ve heard of one mortgage prisoner who is not in arrears, but who is being charged over 10% by his lender.

What needs to happen

More people must be helped to escape their high interest mortgages. These borrowers have ended up in the situation they’re in because their mortgage was sold to an unregulated lenders. These companies do not lend money to new mortgage customers, as most banks and building societies do so have no incentive to be competitive.

What you can do

Gail Smyth is a mortgage broker with a firm called Charles Mac. She says that some people think they are mortgage prisoners, but aren’t. She advises anyone who is on a high standard variable rate to take advice and find out whether or not they are a mortgage prisoner. Some mortgage lenders are more flexible than others when it comes to remortgaging criteria.

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