Numerous consumers 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. Well, we have complied some information that can help you determine what you might be able to do.
In this article, we cover:
- What is a mortgage prisoner in the UK?
- What changes were made to lenders assessments following the financial crisis?
- Mortgage prisoners, what are your options?
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 following the 2008 financial crisis.
This is because before the financial crisis lenders had different criteria and assessments. 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.
Therefore, 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, 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
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. So, 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.
These changes unfortunately left many existing borrowers with mortgages they couldn’t refinance due to not meeting the 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 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 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.
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.
Therefore, extending the term may be advantageous in a manner similar 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. 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 neighbourhood 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:
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 endeavour 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 increases, to ensure that they are sustainable methods of income.
Seek help
If income is the primary factor, you could look for a guarantor. Or, 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.
A gift may also be given to reduce the loan amount, depending on the lender.
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 and other options that may work for your situation.
They can also present your application in the most favourable way to maximise your success. Understanding the market and what lenders look for is crucial when preparing an application.
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 no-obligation consultation.
From here we can advise you on your next steps and chances of success.
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