Journalists have highlighted the difficulties faced by a minority of borrowers who find themselves unable to remortgage to a new home loan.
In its response to the mortgage market review, the Financial Services Consumer Panel said it was concerned about the Financial Services Authority’s proposed transitional arrangements for borrowers who find it difficult to remortgage because of changing market conditions. The FSCP defined these mortgage prisoners as "consumers who have historic mortgages that may now be outside the responsible lending criteria."
A number of commentators have argued that consumers may be disadvantaged because their choices may be restricted, either because they do not have enough equity in their homes to meet tighter lending criteria or because they are affected by proposals that will make it more difficult to take out an interest-only mortgage.
We are also concerned about existing borrowers whose refinancing options are limited, although the standard variable rate they are likely to end up paying as a result is a good option for many, report the CML.
In the last issue of this newsletter, we looked at the issues raised by the FSA’s proposals for interest-only borrowing. In this article, we turn our attention to those borrowers who may find it difficult to remortgage because they do not have enough equity in their home or do not meet responsible lending criteria for other reasons.
Transitional arrangements
The FSA is aware that a potential consequence of introducing new rules for mortgage lending is that there may be restricted choices for existing borrowers looking to remortgage. It is therefore proposing transitional arrangements to help this group of customers. It suggests that new rules on affordability need not apply to existing borrowers looking to remortgage as long as they meet strict criteria, including requirements that:
- there is no additional borrowing;
- the borrower is not allowed to take on higher monthly payments; and
- there is no lengthening of the term of the mortgage.
Over and above these restrictions, the FSA is proposing that the transitional arrangements should not:
- apply to customers who have been in arrears or had a payment shortfall;
- permit the removal of existing borrowers to the mortgage agreement or the addition of new ones; and
- be considered in cases where the size of the loan has already been increased (other than to cover arrangement or other mortgage product fees, or to carry out essential repairs and maintenance of the property).
It is unlikely that many firms will be able to use the transitional arrangements, as proposed, to offer loans to customers seeking to remortgage away from an existing lender: the restrictions on lending new money, altering the term of the mortgage or the repayment method, or making other contractual changes are too onerous.
The new lender is not only prevented from changing many of the key features of the loan, but must also ensure it complies with rules to keep additional records on any business it accepts under the proposed transitional arrangements.
But although lenders are unlikely to take on new borrowers under the proposed rules, they may have other options to help existing customers. In many cases, lenders may be able to respond to their needs by agreeing to vary their current mortgage contract.
With the borrower’s agreement, it may be possible to make changes to the mortgage term, the method of repayment and other loan features, as long as such changes do not create a new contract.
Our option for mortgage "prisoners"
A major concern for lenders about the current proposals is that they do not give firms enough flexibility to help borrowers. This is likely to result in a more limited range of options for a group of consumers whose choices are already restricted because of changing market conditions.
We believe that more borrowers can be helped if the FSA were to consider a different approach, namely to allow exceptions to its policy on responsible lending for mortgage prisoners as long as the mortgage still complies with the rules. This would enable lenders to help customers in exceptional circumstances, and allow borrowers to increase their lending or monthly repayments where it is demonstrably in their interests to do so.
The standard variable rate option
If a borrower is unable to remortgage because his or her circumstances do not fit current lending criteria, the lender will, in almost all cases, agree that the customer should switch to its standard variable rate. (One of the consequences of this is that borrowers who had been paying a fixed rate would have less certainty about the size of their future mortgage commitments.)
It is true that, in recent years, many borrowers who could have remortgaged to other deals have voluntarily opted to revert to the SVR because this has been the cheapest option. It may not stay that way, however: in the last few months, some lenders have raised their SVRs in response to higher funding costs. But SVRs remain low by historical standards and are still the preferred choice of many borrowers.
In its response to the FSA’s mortgage market review, the Financial Services Consumer Panel said it was concerned that mortgage prisoners could "find themselves paying significantly higher interest rates with no options to move elsewhere."
The FSCP has suggested a specific rule to ensure that consumers "are not unfairly treated or discriminated against by reason of their inability to access alternative, more competitive mort
