What is a mortgage prisoner?

Are you trapped in an uncompetitive mortgage deal? Up to 30,000 “mortgage prisoners” could escape their standard variable rate (SVR) deals, following a Financial Conduct Authority (FCA) agreement to relax mortgage switch rules.

Are you trapped in an uncompetitive mortgage deal? Up to 30,000 “mortgage prisoners” could escape their standard variable rate (SVR) deals, following a Financial Conduct Authority (FCA) agreement to relax mortgage switch rules.

Daniel Evans
From the Mortgages team
minute read
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Posted 9 OCTOBER 2020

Why are people trapped in expensive mortgages?

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

There’s a number of reasons why they aren’t able to switch to a better deal or move home, including changes in financial circumstances that lead to homeowners being unable to meet strict affordability criteria laid down by the Financial Conduct Authority (FCA).

Meeting affordability checks

In response to the financial crisis in 2008, the FCA (then the FSA) introduced new lending criteria for homeowners, requiring that borrowers pass strict affordability checks before they could have their mortgages approved.

Since that time, mortgage lenders must evaluate your credit history and spending habits before deciding whether to approve your mortgage application. They can also carry out ‘stress testing’ to check whether you could afford the repayments if income or interest rates were to increase by up to 4% above the standard variable rate (SVR).

If your current financial situation stops you from passing a lender’s affordability checks, then you could become trapped in your mortgage deal or stuck on a SVR mortgage when your current deal ends.

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 are the new FCA mortgage switch rules?

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

Under the new rules, mortgage prisoners can be released from SVR deals if they are:

  • up to date with their mortgage payments
  • planning to stay in their current property
  • have no plans to take out other loans.

Mark Gordon, director of mortgages at Compare the Market, said: "The FCA’s proposals are clearly intended to reduce the time and cost of switching more generally, which is a win-win for consumers."

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. However, there are things you can do to try to release yourself from the trap:

  • Speak to your lender
    They might be able to switch you to a better mortgage deal.
  • 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 your mortgage term. 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, such as gym memberships and phone bills, and consider whether you could switch to cheaper contracts. You could even compare and switch your energy 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.

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