'Mortgage prisoners' trapped on expensive home loans to be freed under new proposals

150,000 people could benefit from switching deals but tools to find the best deals not good enough, says watchdog

Thousands of "Mortgage prisoners" who have been trapped in expensive deals for years could soon be able to find a cheaper loan following proposals from the City watchdog.

Affordability checks which have meant borrowers were unable to switch deals could be transformed under proposals from the Financial Conduct Authority (FCA).

After the financial crisis lenders tightened up their criteria, meaning that some borrowers no longer passed. As interest rates have fallen to near-record lows, these borrowers have been forced to stay on expensive repayments.

The FCA estimates that, in 2016, there were around 30,000 of these so-called mortgage prisoners.

A further 120,000 consumers who have mortgages with lenders that are not authorised by the FCA could also benefit from switching.

The regulator said borrowers should be able to switch internally with their current lender without passing an affordability check. It has also published a consultation paper on the issue.

Martin Lewis, founder of MoneySavingExpert.com, said: "We need to make sure those with existing debts can engage with a competitive market, releasing the pressure valve on their finances.

"If we get this right it's a triple win - it's better for the individual, the economy and lenders."

Gillian Guy, chief executive of Citizens Advice, said the FCA should go further to protect customers from paying the "loyalty penalty" by sticking with their provider.

The consultation is part of a wider review of the mortgage market. The FCA said a significant number of people are paying more than they need to - and competition is limited by the tools available for finding a better deal and switching.

An estimated 30 per cent of consumers in 2015-2016 could have found a cheaper mortgage with the same key features as the product they chose.

On average, these consumers paid around £550 per year more over the introductory period compared to the cheaper product, the regulator said.

Many people generally do switch their mortgage when an initial deal comes to an end, the FCA said.

But it estimates that around 800,000 consumers are paying a relatively high reversion rate - the rate paid when an initial deal comes to an end - and do not switch when they could.

The financial impact on those who do not switch is around £1,000 a year on average during the introductory rate period of a mortgage.

The FCA wants to see more lenders taking part in innovative tools to help customers more easily identify what mortgages they qualify for.

It wants to see more help for people to make an informed choice when finding a broker.

Someone's choice of intermediary can have a significant effect on the cost of borrowing - up to £400 a year during the introductory period of a mortgage - the FCA said.

It is proposing that the Single Financial Guidance Body (SFGB) extends an existing directory to include mortgage intermediaries to help customers make a more informed choice of broker.

After the financial crisis, lenders tightened up their criteria, leaving some borrowers trapped on expensive deals when rates came down (AFP/Getty ) (AFP/Getty)

Jackie Bennett, director of mortgages at trade association UK Finance, said the Government should work with the FCA "to ensure that all customers, regardless of owner, have full regulatory protections to ensure they are treated fairly".

She said lenders have made "considerable strides" in contacting customers about their initial mortgage deal coming to an end, making it easier for people to switch on to a new rate.