If you’re stuck in your current mortgage without the ability to switch to a new mortgage deal or re-mortgage then you might be referred to as a ‘mortgage prisoner‘. This blog will take you through exactly what that means as well as give you some great advice as to how to break free from your mortgage prisoner shackles.
The birth of mortgage prisoners
In the early 2000’s it was commonplace for people to borrow large amounts of money, up to eight times their annual salary. With house prices rising much faster than salaries people were struggling to keep up with their monthly mortgage repayments.
After the 2008 financial crash, a review to tighten lending and borrowing rules came into force from the financial conduct authority (FCA). This meant tighter affordability checks from mortgage lenders and left many who’d previously borrowed heavily unable to get a new mortgage deal. Other borrowers on interest-only mortgage deals realised they had little-to-no equity in their properties and therefore also failed the new affordability checks. These people ended up stuck in their current mortgages, unable to find a better deal and have been termed mortgage prisoners.
Some of the reasons for becoming a mortgage prisoner
Due to the strict affordability tests brought in after the financial crisis people who had previously borrowed much more than their income were left unable to meet the new eligibility rules which look closely at income and expenses to determine how much money you are able to borrow. This left them trapped as mortgage prisoners with their existing mortgage provider, often on their unfavourable standard variable rate or SVR mortgage repayment schemes.
Although the financial crisis lead to a large increase in UK mortgage prisoners, there are other changes in circumstance that could lead you to be considered a mortgage prisoner because the maximum mortgage you can get is based on your earnings against the value of the property, equity you may have from a deposit or an increase in property value if you’re re-mortgaging.
Therefore, if your financial circumstances change (for example you lose your job, go part-time or take a pay cut) then it could affect the amount you are able to borrow and therefore your ability to get a cheaper deal for your outstanding mortgage.
Is there any help available for mortgage prisoners?
In October 2019, the financial conduct authority (FCA) introduced new mortgage lending rules to help those trapped as mortgage prisoners be eligible to switch mortgages to a more affordable mortgage deal so long as you are up to date on your mortgage repayments.
The new rules state that a mortgage lender can agree to carry out a modified affordability assessment for mortgage prisoners, if the criteria below are met.
Many mortgage firms have been required to write to customers who are unable to switch and may benefit from these changes. However, if you have received a letter, it does not mean you are automatically eligible for help, you will still need to speak to your lender to discuss your individual circumstances and whether you meet the required criteria.
Criteria for help as a mortgage prisoner:
- You have a current mortgage on the house in which you live.
- You have been up-to-date with your repayments for the last 12 months (this period does not include the ‘mortgage repayment break’ offered to consumers during the Covid-19 pandemic).
- You aren’t looking to move house or remove/add any persons from the mortgage.
- You don’t want to borrow any more money, you just want a new and improved deal for your current mortgage on your current property.
- You do not have a buy-to-let mortgage.
- The property must be worth at least £60,000.
- A loan to value of no more than 85% (the amount you want to borrow compared to the value of your home).
There are also some caveats to eligibility for the modified affordability assessment based on how much you have left to pay. You must have at least five years and £50,000 left to pay on your mortgage to be eligible to be considered under the new rules.
Checking whether you are eligible for help as a mortgage prisoner
There is an eligibility checker available from the government’s help for mortgage prisoner’s page that can be downloaded.
What happens if you are not eligible under the new scheme?
If there is any chance you can do any of the following, it may help you pass affordability checks and help you get a better deal on a new mortgage.
- Overpay so that you have a lower mortgage to borrow and increases your equity on the property, alternatively you can try to pay your mortgage off (do check beforehand with your lender how much you can pay off before you are charged with an early repayment fee).
- Get a pay rise to help increase the maximum amount you can borrow.
- Reduce other debts and outgoings you have which, again, will increase the amount you can borrow.
- Consider downsizing to reduce the amount you’d need to borrow.
Other switching options
If you can demonstrate that your repayment plan is affordable a lender may be able to offer other ways of helping as they will look at each application on an individual basis. This may include options for older borrowers such as retirement interest only mortgages or equity release. Alternatively the existing lender may consider total or partial conversion to repayment from an interest-only mortgage.
Remember that taking action early will put you in the best possible position when it comes to renewing your mortgage so don’t delay until your fixed term is up. If you are struggling to pay your mortgage or are already in arrears then it is imperative to act now. You can always contact our independent financial advisor, Martyn for help and advice about a better mortgage deal, regardless of whether you are considered a mortgage prisoner or not.