Mortgage Prisoners: what’s all the fuss about?
The term mortgage prisoners has been bandied about quite a lot in recent months due to the Mortgage Market Review (a new set of rules for the mortgage market) which were brought in to force in April 2014. The reason the story is still making headlines is because the true ramifications of these news rules are only just starting to be felt by home-owners up and down the country.
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When a home-owner takes out a mortgage they agree a fixed term with a provider which usually locks in a deal of either two, five or ten years, sometimes longer. When that deal comes to an end, the home-owner will revert to the Standard Variable Rate (SVR) which is often significantly higher than the deal they agreed in the first place. At this time, the home-owner will usually try to re-mortgage i.e. to secure another good deal from their existing provider or elsewhere.
The Mortgage Market Review has meant that mortgage providers need to apply stricter affordability checks and if a home-owner doesn’t measure up, then a provider may even refuse to offer an existing customer a new deal – leaving them stranded on a higher SVR. Where existing mortgage holders are unable to re-mortgage, they are being labelled ‘mortgage prisoners’ due to the fact they are trapped on an existing deal and unable to shop around.
Why has this issue only come to a head now?
Although the majority of home-owners are mostly on 2, 5 or 10 year terms, these contracts are all staggered and so it is only as these deals individually come to an end and the existing mortgage holder is unable to re-mortgage, that the full extent of the issue has become clear.
Why there could be good reasons to switch from SVR
Sometimes being on SVR can offer flexibility such as being able to make over payments, however for many remaining on a high SVR can mean that the home-owner could be more at risk from future interest rate rises and the associated increase in monthly repayment costs.
The real point here is about choice. If someone wishes to remain on their SVR then they are within their rights to do so. However on the flip side, home-owners who are looking to actively manage their finances and reduce they repayment costs should be allowed the option to shop around.
What is being done to help mortgage prisoners?
If a home-owner doesn’t meet the new affordability checks but their circumstances haven’t changed and they are not looking to increase their borrowing, then mortgage providers are allowed to assess their application for a new mortgage deal without applying the affordability tests. This is referred to as a ‘transitional arrangement’.
Whilst this solution is good on paper, its application is somewhat more complicated. Some providers are simply not considering an application unless the home-owner can meet the new affordability checks (even if the applicant has been a customer for many years).
Many providers have automated systems which do not offer the flexibility to consider individual circumstances; limiting their ability to apply transitional arrangements.
So where does that leave mortgage prisoners?
Until recently, pretty much high and dry in terms of choice across the mortgage market, but now some lenders are willing to consider applicants who have been turned down by other providers by using transitional arrangements. There are some strict criteria with which mortgage prisoners need to comply: they must have kept up with their repayments, they must not be looking to borrow additional funds and their circumstances cannot have adversely changed.
The types of mortgage lenders who are willing to receive applications via the transitional arrangements are more flexible in the way in which they review applications. They tend to apply manual underwriting which means that qualified professionals review the application on an individual basis, which can often lead to a more favourable outcome.