Numerous consumers are currently classified as mortgage prisoners and have inquired about their available options. If you find yourself in this circumstance, we have compiled some information to help you determine what you may be able to do. In this article, we cover:
- What are mortgage prisoners?
- Mortgage Prisoners, what are your options?
What is a mortgage prisoner?
A mortgage prisoner is a borrower who is currently on their existing mortgage but unable to move to a better offer due to changes in lenders’ criteria following the 2008 financial crisis. Therefore, these debtors are considered to be imprisoned or stuck with their present mortgage lender.
A recent inquiry conducted by the Financial Conduct Authority (FCA) 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; and
– 18,000 are near term, not being able to switch
Mortgage Prisoners, what are your options?
If you are in the difficult position of being a mortgage prisoner, there are some things you may do to boost your options:
Reduce your balance
- Affordability and loan-to-value ratio (LTV) play a significant role in mortgage lenders’ evaluations. If you do not fulfil a lender’s affordability requirements for your current loan size or if your LTV ratio exceeds the maximum allowed for a modification, it may be worthwhile to explore reducing your loan amount if possible. The interest savings on your mortgage could far outweigh whatever gains you may be earning on your savings.
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, so extending the term may be advantageous in a manner analogous to reducing the loan amount.
You always can overpay on your mortgage if the scheme permits, which could reduce the length of time it takes to pay off your loan or physically reduce the term if your income and finances permit it in the future.
- If you enjoy living in your current location, relocating may never be the best decision. However, if you are struggling to meet your mortgage payment obligations, it is 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 fact, you may not need to downsize, as relocating to a less expensive neighbourhood can sometimes yield a home of comparable size and value.
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
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 therefore be a worthwhile endeavour. Ideas such as second jobs or taking advantage of overtime at work may help. A lender will likely want to see a history of any increases to ensure that they are sustainable and not merely a means to switching your loan.
- If income is the primary factor, look for a guarantor or, more commonly accepted today, someone to add to the mortgage.
Joint Borrower Sole Proprietor is a term used to describe where the joint applicant(s) are identified on the mortgage but not legally owned by certain lenders. A gift may be given to reduce the loan amount, depending on the lender.
Employ a mortgage broker
- They can explore all the above options to find the best fit for you and other options that may work for your situation. They can also present your application in the most favourable way to maximise your success.
Contact us if you have any further questions.