This month marks a decade since customers of Northern Rock started queuing around the block to remove their money from the beleaguered bank.
It seems like ancient history but many “mortgage prisoners” are facing huge borrowing costs thanks to the legacy of a seismic shift in lending criteria rules that followed the credit crunch.
There are currently a million homeowners in the UK who are trapped on their lender’s default standard variable rates (SVR) of interest because they signed up to mortgage deals before the rules changed and now can’t switch because they don’t meet the affordability criteria brought in by the Bank of England in 2014.
Stuck on an SVR, these borrowers will almost always be paying a far higher rate of interest than they would be on a competitive deal – the average SVR among the big six lenders is currently 3.85 per cent.
Inevitably, the problem is most acute in London, where, with an average of £243,000 currently outstanding on their home loan, a mortgage prisoner with one of the UK’s big six lenders is currently paying an extra £9,364 in annual interest because they can’t switch from their SVR – more than a third of the average disposable income in the capital.
That’s £6,591 more than they would pay on the leading two-year fixed rate among the same big six (currently HSBC at 1.14 per cent). This means that they could free up 26 per cent of their disposable income if they switched to this leading deal, according to online mortgage broker Trussle.
But this is a nationwide problem. In the East of England borrowers stuck on SVRs with a far smaller typical outstanding mortgage of £145,600 are still paying about £4,000 every year in unnecessary interest – worth more than a quarter of the average disposable income in the region.
And in the South West, where the best two-year deal could mean paying only £1,400 on the average £121,000 outstanding debt, mortgage prisoners are likely to be paying around £4,650 – also a quarter of their average disposable income every year.
“There are many mortgage prisoners who are keen to remortgage off an expensive SVR but can’t because of tighter underwriting criteria and affordability tests,” Adrian Anderson, director of mortgage broker Anderson Harris, says. “The anomaly is that these borrowers are deemed unable to meet the affordability criteria of better rates with their existing lender or a new one. The result is that the existing lender keeps them on a higher rate, which they can’t afford.”
The first step is to check with your lender whether it is prepared to offer you anything better than the rate you are on. If it can’t or won't, and a broker can’t find a better deal for you, then it is worth pursuing this with the Financial Ombudsman Service, which is already dealing with a number of similar complaints.
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“Many factors are contributing to the troubling number of mortgage prisoners across the UK, and we’re now seeing that geographic location also plays a large factor in how hard you’ll be hit should you end up stuck on your lender’s SVR,” says Ishaan Malhi, chief executive of Trussle.
“While some lenders do offer help to mortgage prisoners, too many are in effect holding these borrowers to ransom, while they collectively lose around £13m per day in excess interest. This needs to change urgently. Our recent Mortgage Switch Guarantee proposals call for a new set of industry standards to be implemented to help borrowers on SVRs switch mortgage. One of the key proposals recommends that all lenders have some form of duty-of-care to their customers, possibly in the shape of offering a range of relief options to mortgage prisoners.
“Whether this takes the shape of a payment holiday when it’s clear a borrower can’t afford their payments, or an obligation for lenders to refinance mortgage prisoners who meet certain criteria, it’s clear that addressing this issue is more urgent than ever.”
“The borrowers with the biggest challenges are those mortgaged to lenders who are no longer actively lending and are trying to run their book down,” Mark Harris, chief executive of mortgage broker SPF Private Clients, says. “There is no reason for them to offer a competitive retention product – they want people to remortgage.
“It is getting easier – there are a number of residential lenders who will consider remortgages for customers who have demonstrated an ability to service debt at a higher rate providing they are reassured that it is a debt they can continue to service. It is not always about having three pay slips and a P60 and a multiple of 4.5 times income. More flexibility is being shown, particularly by those lenders adopting a manual underwriting process.
“Clearly those borrowers who have run into credit issues are harder to ‘release’ and again those with high loan-to-values (above 85 per cent) also fall into this category. It is still worth seeking independent advice though as to whether there is a solution rather than assuming there isn’t and languishing on a much higher SVR.”
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