"In the current economic environment, lenders are understandably cautious but that largely leaves the problem unsolved, with mortgage prisoners left in limbo."
As of 30 June 2021, there are around 195,000 mortgages in the population of closed books with inactive firms. The FCA estimates that there are 47,000 mortgage prisoners within this total, who are able to switch and would save money on a new mortgage rate.
The inactive firm closed book population has reduced from around 250,000 in 2019, when the FCA estimated that 170,000 were up-to-date with payments and would be eligible to switch under new regulatory rules.
Since then, active lenders, covering around 97% of the active market, agreed to give existing residential mortgage customers on a reversion rate the option to move to another deal, if they meet certain criteria such as being up to date with payments.
In October 2019, the FCA changed its rules to allow lenders to use a modified affordability assessment for borrowers who were up to date with payments to enable them to switch to a more affordable mortgage.
In October 2020, further rule changes meant that active lenders no longer have to make an affordability assessment when they offer a new deal to borrowers in closed mortgage books of a lender in the same financial group. This is as long as these borrowers meet certain criteria, such as there being no overall change that materially affects the mortgage’s affordability.
To estimate the current number of mortgage prisoners, the FCA removed the following groups of mortgages from the closed book population of 195,000 mortgages:
• First, 34,000 mortgages (17% of mortgages in closed books with inactive firms) where borrowers cannot switch as they are not up to date with payments.
• Second, 18,000 mortgages (9%) which are near term (balance of less than £10,000 and/or have a short remaining mortgage term of two years or less).
• Third, the borrowers of 66,000 mortgages (34%) who should be able to switch because they are likely to be within the credit risk appetite of active lenders. While some of these 66,000 may not save money by switching, for example because they pay a relatively low rate or have a small balance outstanding on a repayment mortgage, others who pay higher rates may benefit from switching to a cheaper deal.
The remaining 47,000 mortgage prisoners pay 4.3% on average and typically pay rates between 4.1% and 4.4%.
Gemma Harle, managing director of Quilter Financial Planning, commented: "Today’s FCA review into mortgage prisoners reveals that there around 47,000 people who are unable to switch to a better mortgage deal even though they would benefit from switching and would be paying less per month than they currently do.
"For some time now inflation has been increasing and it is heavily touted that at the next Monetary Policy Committee meeting the Bank of England would announce an interest rate hike. While the emergence of the new Omicron variant might mean that this decision is pushed back, at some point in the not-too-distant future rates are likely to increase. When they do, mortgage prisoners are often the borrowers hit hardest as they have no means of moving to cheaper mortgage deals and have to stick with their inactive lender’s standard variable rate leaving them with no control of potentially spiralling mortgage repayment costs.
"The FCA rightly highlights in the review that the rules it has put in place to help this group can only be effective if lenders are willing to apply the new assessment and offer a product for mortgage prisoners to allow them to switch. In the current economic environment, lenders are understandably cautious but that largely leaves the problem unsolved, with mortgage prisoners left in limbo.
"Our mortgage network supported the FCA’s call for mortgage intermediaries to help mortgage prisoners back in July 2020 but without lender support and a proliferation of mortgage products aimed at these customers, it is going to be difficult to move these people into more suitable products even with financial advice. As intermediaries we are committed to helping this type of customer, but it requires solutions from the whole industry rather than just one segment of it.
"We hope that HM Treasury takes the insights from this review and does what’s necessary to find practical and proportionate solution that can be help the thousands of affected borrowers."
