UK Mortgage Prisoners – what can you do?

Numerous consumers across the UK are currently classified as mortgage prisoners and have inquired about their available options.

So, what do you do if you find yourself in this situation? We have compiled some information to help you determine what you might be able to do to get out of this situation.

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What is a mortgage prisoner in the UK?

A mortgage prisoner is a borrower who is currently in an existing mortgage but unable to move to a better offer due to changes in lenders’ criteria in 2014, which were influenced by the 2008 financial crisis.

This is because before the financial crisis, lenders had different criteria and assessments that were more lenient to borrowers. However, following the crisis lenders changed their criteria.

This meant that people who may have initially qualified for a mortgage no longer did. As a result, many individuals were unable to remortgage to a better deal. These debtors are considered to be imprisoned or stuck with their present mortgage lender.

An inquiry conducted by the Financial Conduct Authority (FCA) in 2021^[1], at the request of the government, provided a sense of the magnitude of the issue. The FCA approximates that of the 195,000 consumers who have mortgage accounts with inactive lenders:

• 66,000 may be able to switch
• 30,000 cannot switch but would be unlikely to benefit if they could
• 47,000 are actual mortgage prisoners
• 34,000 are in payment shortfall
• 18,000 are near term, not being able to switch

What changes were made to lenders’ assessments following the financial crisis?

Lenders made various changes to how they assess a borrower following the financial crisis. What exact changes were made?

• Tighter credit standards: Lenders became much more cautious about who they would lend to. This means that lenders now require a better credit history, larger deposits, and stricter income verification procedures.
• Focus on affordability: The emphasis shifted towards a borrower’s ability to repay the loan throughout its term, not just initially. This involved a more thorough assessment of income and expenses to ensure the borrower could handle potential interest rate increases, which would result in larger monthly payments.

These changes unfortunately left many existing borrowers with mortgages they couldn’t refinance due to not meeting this new stricter criteria.

What are your options as a mortgage prisoner?

If you are in the difficult position of being a mortgage prisoner, there are some things you can do which may boost your options:

Reduce your balance

Affordability and loan-to-value ratio (LTV) play a significant role in mortgage lenders’ evaluations. If you don’t fulfil a lender’s affordability requirements for your current loan size, or if your LTV ratio exceeds the maximum allowed, it may be worthwhile exploring reducing your loan amount if possible.

The interest savings on your mortgage could far outweigh whatever gains you may be earning on your savings. To reduce your balance, you could look to use savings to contribute to the existing loan amount.

Increase your term

Although we would not ordinarily recommend this, there are circumstances in which it is a viable option. The term of your loan can affect a lender’s assessment of your ability to repay. This is because a longer term will mean smaller monthly payments, therefore your affordability may be seen as more favourable by lenders. However, longer terms mean you will pay more interest.

Therefore, extending the term may be advantageous in a manner similar to reducing the loan amount. You can always overpay on your mortgage if the scheme permits, which could reduce the length of time it takes to pay off your loan. This can also physically reduce the term if your income and finances permit it in the future.

Downsize

If you enjoy living in your current location, relocating may never be the best decision. However, if you are struggling to meet your mortgage payments, it’s possible that the amount of debt on your home exceeds your budget.

It is possible to achieve a higher quality of life by downsizing and reducing this liability. In some cases you may not need to downsize. Instead, relocating to a less expensive area can sometimes yield a home of comparable size.

Find a lender with relaxed criteria for mortgage prisoners

New regulations were enacted following the FCA’s review that allows mortgage prisoners to receive more lenient treatment. This is still a discretionary approach for lenders, and your situation must continue to meet the following minimum requirements:

• A minimum 5-year term
• No mortgage arrears in the last 12 months
• A minimum balance of £50,000
• No increase to current lending permitted
• Maximum 75% loan-to-value

Which lenders offer products designed to help mortgage prisoners?

From our experience, some lenders that offer these specialised products are:

• Halifax
• Santander
• NatWest

Boost your income

In general, we find that affordability or income is the primary obstacle for mortgage prisoners. Attempting to increase your level of income may be a worthwhile step to take if possible.

Ideas such as second jobs or taking advantage of overtime at work may help. A lender will want to see a history of this additional income to ensure that they are sustainable methods of income that can be used to cover monthly payments.

Seek help

If income is the primary factor, you could look for a guarantor. Another more commonly accepted thing today is adding someone to the mortgage. A Joint Borrower, Sole Proprietor is where a person may be identified on the mortgage but they do not legally own the property.

These options allow an additional person’s income to be included in a lender’s affordability assessment, which increases your chances of success as lenders will see you as a lower borrowing risk.

Depending on the lender, a gift may also be given to reduce the outstanding loan amount. This will reduce the risk a lender is exposed to, as they are lending less money in relation to the value of your property.

Employ a mortgage broker

Using a mortgage broker for any type of mortgage can boast a range of benefits. In this case, a broker can explore all the above options to find the best fit for you.

They can also present your application in the most favourable way to maximise your success. From their experience, they will be able to understand the market and what lenders look for.

If you’re a mortgage prisoner and are looking to get out of your current term, why not reach out today? Our expert mortgage advisors are on hand to discuss your situation over a free initial no-obligation consultation. From here we can advise you on your next steps and chances of success.

Frequently asked questions

What if I have an interest-only mortgage?

If you currently have an interest-only mortgage product and are also a mortgage prisoner, it is still possible for you to switch to new deal.

You may also be able to either switch to a full repayment product, or even a product that is part interest-only and part repayment.

Of course, like with any interest-only product, a lender will need a clear repayment vehicle to be in place, that proves you will be able to pay off the loan amount when the mortgage ends.

If your repayment vehicle is deemed as not strong or secure enough, a lender may not be willing to accept your application.

Are there any other consequences of being a mortgage prisoner?

The main consequence of being a mortgage prisoner is the money you spend on interest in the long-term. As a mortgage prisoner you are locked-in with your current lender and product, typically on their standard variable rate (SVR), which is usually quite high compared to other product types.

In turn, you will end up paying much more in interest compared to someone who is able to switch products much more freely.

This can bring financial strain for many, which can limit your ability to save up or invest, keeping you trapped for even longer.

References

[1] Financial Conduct Authority, Mortgage Prisoner Review – 29/11/21