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What is a mortgage prisoner?

Are you trapped in an uncompetitive mortgage deal? Ordinarily, remortgaging is a good way to reduce your monthly bills, but this option isn’t available to tens of thousands of people stuck paying expensive mortgages.

Are you trapped in an uncompetitive mortgage deal? Ordinarily, remortgaging is a good way to reduce your monthly bills, but this option isn’t available to tens of thousands of people stuck paying expensive mortgages.

Written by
Sajni Shah
Consumer expert on money and utilities
30 NOVEMBER 2021
6 min read
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Why are people trapped in expensive mortgages?

‘Mortgage prisoner’ is a term for homeowners who find themselves trapped in pricey mortgage deals.

There’s a number of reasons why they might not be able to switch to a better deal or move home, including changes in financial circumstances. Mortgage prisoners are typically people who took out a mortgage before 2014, when new affordability rules were brought in by the Financial Conduct Authority (FCA).

How did affordability checks change after the financial crisis?

In response to the financial crisis in 2008, the FCA introduced new lending criteria for homeowners. When you’re applying for a mortgage, you must now pass strict affordability checks before you can be approved. Lenders will evaluate your credit history and spending habits, and also carry out ‘stress testing’. This checks whether you could afford your mortgage repayments if interest rates were to increase by up to 4% above the lender’s standard variable rate (SVR).

The point of these rules was to prevent another financial crash by stopping people taking out mortgages they might struggle to afford later on. But it also meant that, through no fault of their own, many people who were previously accepted for a mortgage were no longer in a position to meet the stricter criteria.

Most mortgage prisoners are stuck on standard variable rate (SVR) mortgages, which is what you end up on once your introductory or fixed-rate deal ends, unless you remortgage. They’re often paying hundreds of pounds a year more than they would if they were able to switch to a more competitive deal.

What is a ‘closed book’ mortgage?

Most mortgage prisoners are also ‘closed book’ customers. This means they’re borrowing from a lender that no longer offers new mortgage products.

This includes people who took out mortgages with the likes of Northern Rock and Bradford & Bingley, which were nationalised during the financial crisis. Their mortgage books were sold to inactive lenders or unregulated firms which often charge high rates of interest. And, because many of these customers don’t meet the updated affordability criteria, they’re unable to remortgage to another lender.

What does it mean to have negative equity?

Negative equity means that the value of your home is lower than the amount still to pay on your mortgage. This puts homeowners in a difficult position when it comes to selling and remortgaging their home.

If a homeowner is unable to remortgage at the end of their mortgage deal, it’s likely that they’ll be moved on to their current lender’s SVR. This will typically be more expensive, making it even more difficult for mortgage prisoners to escape negative equity.

What’s been done to help mortgage prisoners?

In October 2019, the FCA released guidance for mortgage lenders, removing some of the barriers that stop mortgage prisoners from finding cheaper mortgage deals.

Lenders now have the option to use a ‘modified affordability assessment’, which waives some of the strict checks. This means that some homeowners who were previously trapped on expensive deals have been freed. But the policy is optional, so not all lenders are offering new deals to mortgage prisoners.

Under the modified rules, you can be released from SVR deals if you:

  • are up to date with your mortgage payments
  • have at least five years left to run on the mortgage
  • have a remaining mortgage of at least £50,000
  • have a loan-to-value (the amount you want to borrow compared with the value of your home) of no more than 85%
  • are planning to stay in your current property
  • have no plans to take out other loans.

If you're a mortgage prisoner, you should have received a letter towards the end of 2020 telling you what your options are.

What next for mortgage prisoners?

Mortgage prisoners were dealt a hammer blow in April 2021 after MPs rejected an amendment to the Financial Services Bill that would have capped interest rates for the estimated 250,000 borrowers stuck with closed book lenders.

But the government has pledged to explore other options that might help mortgage prisoners. It has asked the FCA to review its existing data on borrowers with inactive firms who are unable to switch, as well as the effects of its rule change on affordability checks.

Following the review, the government says it will look for practical solutions to help as many affected borrowers as possible switch to an active lender.

What to do if you’re a mortgage prisoner

It can be easy to lose hope when you’re stuck on an expensive mortgage deal. If you’re not able to switch to a new lender, there are things you can do to try to release yourself from the trap:

  • Speak to your lender
    You might be able to apply for a product transfer if your lender offers new mortgages. This would allow you to swap your existing deal for a cheaper one with the same provider, but you'll need to be up to date with your repayments.
  • Overpay on your mortgage
    If you’re not looking to move home in the near future, gradually overpaying on your current mortgage can be an effective way to escape negative equity. Overpaying your mortgage can increase your equity (the portion of the property you own from paying off your mortgage), reduce the overall interest you pay and shorten the length of your mortgage. Talk to your lender to find out how much you’re allowed to overpay without being charged.
  • Review your finances
    If you’re looking to move and want to increase your mortgage, but you know you’ll struggle to meet the affordability rules, it might be time to review your finances. Take stock of all your regular payments, like gym memberships and phone bills, and consider whether you could switch to cheaper contracts. You could even compare and switch your home insurance and broadband.

  • Search for a negative equity mortgage
    In some exceptional circumstances, lenders may be willing to offer a negative equity mortgage. This isn’t an option that’s usually advertised, however it’s worth speaking to your lender if you feel you have essential reasons for moving to a new home.

Frequently asked question

What if I have an interest-only mortgage?

If you’re on an interest-only mortgage – which was a popular form of lending before the financial crash – you may still be able to benefit from the relaxed affordability rules. But lenders will expect you to provide proof that you have a plan to repay the outstanding mortgage at the end of its term.

If I’m behind with my mortgage payments, am I a mortgage prisoner?

The FCA has made it clear that homeowners who are behind with their payments are not classed as mortgage prisoners. It defines mortgage prisoners as borrowers who are unable to move to a new mortgage deal, despite being up to date with their payments and potentially benefitting from switching.

Where can mortgage prisoners get support?

UK Mortgage Prisoners is a support group for people trapped in their current deals. It campaigns to highlight what it calls the unfair treatment of mortgage prisoners and continues to lobby the government to change the law.

If you’re finding it difficult to pay your mortgage, talk to your lender or contact Citizens Advice, StepChange or National Debtline for free advice.

Car Finance 247 Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged over 18 or over. Credit is subject to status and eligibility.

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Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

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