Banking

Mortgage prisoners: FCA publishes a review on those trapped

There are 47,000 mortgage prisoners in Britain the Financial Conduct Authority estimates in a new review, but experts say the true figure could be double that.

Mortgage prisoners are those trapped on a high interest rate and unable to remortgage.

The FCA’s Mortgage Prisoner Review found that 94 per cent of mortgage prisoners were on variable rates, meaning they would pay even more after the rumoured rise in the Bank of England’s base rate.

This could happen as early as December as policymakers seek ways to curb rising inflation. However, it would bring mortgage rates up with it. 

The Financial Conduct Authority estimates that there are 47,000 mortgage prisoners

The review was announced in April after MPs voted down an amendment to the Financial Services Bill, which would have introduced a cap on the standard variable interest rates that mortgage prisoners pay.

It found that 36 per cent of mortgages were on a standard variable rate, 30 per cent on a base rate tracker, and 27 per cent on a Libor tracker.

All of these borrowers would see an instant rise in their mortgage payments if the base rate increased.

In the mainstream mortgage market, 73 per cent of borrowers are on fixed rates, meaning that borrowers would be protected from rate rises until their fixed term ended.

Gemma Harle, managing director of Quilter Financial Planning, said: ‘When [interest rates increase], mortgage prisoners are often the borrowers hit hardest. 

‘They have no means of moving to cheaper mortgage deals and have to stick with their inactive lender’s standard variable rate leaving them with no control of potentially spiralling mortgage repayment costs.’

The FCA has put in place several rules over the years to encourage banks to lend to mortgage prisoners on more lenient terms to help them switch, but most are voluntary on the banks’ part.

Harle continued: ‘Without lender support and a proliferation of mortgage products aimed at these customers, it is going to be difficult to move these people into more suitable products even with financial advice.

‘We hope that HM Treasury takes the insights from this review and does what’s necessary to find practical and proportionate solution that can be help the thousands of affected borrowers.’

Why do mortgage prisoners exist? 

Mortgage prisoners exist for several reasons, however many took out highly-leveraged home loans with lenders such as Northern Rock, which went under during the 2008 financial crash.

Their mortgages were then sold on to investment firms that do not offer new mortgages – known as ‘closed books’.

As banks tightened their lending criteria, many found themselves unable to switch to a new lender and have been trapped on high standard variable rates at a time when wider interest rates have fallen to much lower levels.

Rate hike risk: A base rate rise would be bad news for mortgage prisoners, as they would see their payments rise, but are unable to switch to a lower-cost deal

Rate hike risk: A base rate rise would be bad news for mortgage prisoners, as they would see their payments rise, but are unable to switch to a lower-cost deal 

The average rate among mortgage prisoners is 4.3 per cent, but some mortgage prisoners have told This is Money that they are paying rates as high as 9 per cent.

In comparison, the UK average rate for a two-year fixed mortgage was 2.29 per cent in November according to Defaqto.

And with many stuck on interest-only deals, they will be forced to sell their home when their term ends in order to pay off the balance. 

The FCA said 53 per cent were on interest-only mortgages, compared to 9 per cent in the active market.

How many mortgage prisoners are there?

The FCA review calculated that there were 195,000 borrowers who had mortgages with inactive lenders. Examples of these firms include NRAM, Landmark Mortgages and Heliodor.

It said this figure had reduced from around 250,000 in 2019 and now represented 2.3 per cent of the total number of residential mortgages.

However, the FCA said most of these borrowers were not mortgage prisoners by its definition.

It said that of the 195,000 borrowers, 34,000 had missed mortgage payments and 18,000 were near the end of their mortgage.

The FCA did not count these people towards its mortgage prisoner total, as it said they would not be able to switch lender.

It said that there were a further 96,000 who wouldn’t get a better by switching, as they were on a ‘low rate for their circumstances’.

It calculated that this leaves 47,000 mortgage prisoners.

However, finance experts have disputed this figure, saying that those who are behind on payments or nearing their term end were still mortgage prisoners.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: ‘Almost 50,000 mortgage prisoners are still stranded on horrendously expensive mortgages, according to FCA figures, but the real number of people trapped is closer to 100,000, and they face a nightmare Catch 22,’ she said.

‘Prisoners are trapped in a vicious circle. They’re often paying a far higher interest rate than everyone else, and while the average rate of 4.3 per cent is bad enough, 3 per cent of them are paying over 5 per cent.

‘It means they’re completely focused on making ends meet, so tackling their underlying problems becomes a Herculean task. If every penny is going on your existing mortgage, it’s harder to pay down a big outstanding interest-only balance.

‘Likewise, if it absorbs a major chunk of your income, you run the risk of missing payments. And both of these things make you more likely to remain a prisoner for even longer.’

How many are behind on payments?

Of all the closed book mortgages, the FCA review found that 17 per cent of borrowers were behind on payments – compared to just 2 per cent in the mainstream mortgage market.

However, it said there was no link between the rate someone on a closed-book mortgage paid, and how likely they were to be up to date on payments.

It said: ‘Borrowers in closed books with inactive firms who pay higher interest rates are not more likely to be in payment difficulty, compared to those who pay lower rates.’

Almost all (97 per cent) of the closed book mortgages identified by the FCA were originated in the pre-financial crisis period up to 2008, compared to 19 per cent of mainstream mortgages, the review found.

The review found that, in the first half of 2021, more than 2,000 mortgage prisoners found a way to switch to another lender. However, this made up only a small proportion of the 20,486 accounts that were closed in that period.

Many of those will have had to sell their home in order to pay off their remaining mortgage and close their account.

The FCA’s review found that 50 per cent of borrowers in closed books with inactive firms paid a current interest rate of 3 per cent or less. A similar number (47 per cent or around 91,000) paid interest rates of between 3 per cent and 5 per cent.

That leaves 3.3 per cent or around 6,000 paying more than 5 per cent.

In contrast, the FCA review said that 82 per cent of borrowers with active lenders paid a current interest rate of 3 per cent or less.

However, it also said 95 per cent of closed-booked mortgage borrowers were on a lower rate now than they were when they initially took out their mortgage.

The review also reflects the changes in the mortgage market between the financial crisis, when the majority of the loans were taken out, and now.

Of borrowers on closed books, 46 per cent did not provide evidence of their income when they took out their mortgage compared with 11 per cent of those on active books.

And one in five closed-book borrowers had impaired credit when they took out their mortgage, compared with under 1 per cent of active book mortgages.

Before the crisis, borrowers were able to access ‘self-certification’ mortgages where they could borrow without having to prove their income. These were removed from the market by the FCA in 2014.

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