Eight methods to help mortgage prisoners trapped on loans they can’t afford

Martin Lewis-funded research from LSE London, area of the London School of Economics, outlines the steps that may be come to help homeowners trapped with mortgages they can't afford.

The work was funded in February this season from Mr Lewis' charitable foundation. At the time, he explained leaving people locked into unaffordable mortgages might be 'catastrophic'.

Now, LSE's team of researchers – which includes academics, former mortgage industry professionals along with a consumer harm analyst – has published the results of their work, which proposes eight possible solutions to the mortgage prisoner problem.

Here, Which? looks at simultaneously potential solutions and just what they might mean for thousands of struggling homeowners across the nation.

What are mortgage prisoners?

A mortgage prisoner is someone who can't switch using their current mortgage to another one, usually due to affordability tests. They often end up paying a higher standard variable rate (SVR) when their fixed-rate period ends, usually after two to Ten years. Unlike fixed rates made to attract new customers, SVRs aren’t affordable and are often a lot greater than fixed-rate offers.

Often mortgage prisoners are customers of inactive lenders – companies that own and collect mortgage debt, but can't give out new mortgages or change their mortgages' terms. This is usually a consequence of the 2008 financial crisis, when major mortgage lenders for example Northern Rock collapsed coupled with your finance books sold on.

Market regulator the Financial Conduct Authority (FCA) estimates there are around 250,000 people with mortgages from firms such as these.

Which? has heard stories from dozens of mortgage prisoners, many of whom are in serious distress and facing eviction because they can not afford their monthly bills.

What will the LSE research suggest?

Solutions for mortgage prisoners have been proposed before, but this new report represents probably the most high-profile attempt to remedy the problem to date.

The researchers suggest eight measures that may release mortgage prisoners. They say a couple of them should be implemented immediately, and the other six deserve 'further investigation'.

You can read the entire report here.

Measures to be implemented immediately

These are smaller steps that may be taken immediately, as opposed to a few of the bigger possible remedies also suggested:

• Provide better information – including information on who owns mortgage prisoners' loans and existing customer protections
• Provide debt advice – the government could fund and signpost independent debt-counselling organisations to assist mortgage prisoners with all of their finances, not only mortgages

Measures for further investigation

1. Government equity loans

Many prisoners have interest-only mortgages, meaning they repay only the interest – and never your debt balance – every month. Because of this, they will not have built up equity in their homes, therefore the loan-to-value ratio (LTV) of any new mortgage they make an application for must be high. Likely excessive for a lender to accept.

An equity loan from the government could help lower these LTVs, potentially giving mortgage prisoners the ability to remortgage.

2. Help with ‘Together’ loans

The Together loan would be a popular hybrid product from Northern Rock before the crash. It gave customers a higher LTV mortgage and an unsecured loan at the same time. Customers paid these in a combined monthly payment.

However, should you switch your mortgage to a different provider, the unsecured loan's rate of interest shoots up, with what some have likened to some 'punishment' for leaving Northern Rock.

The LSE London paper suggests the federal government investigate a method to decouple the loan and mortgage elements in a way customers are able to afford.

Last year, we spoke to an airline pilot who took out a Together loan in 2007. He described his situation like a 'mortgage trap' he still hasn’t escaped.

Read more: 'There's no way out': pilot shares his mortgage prisoner nightmare

3. Partial write-offs and government equity loans

Mortgage prisoners who are in arrears and/or negative equity will find it impossible to refinance.

So the report suggests lenders could write-off areas of mortgage prisoners' loans, possibly with incentives from the government, along with government equity loan could be put on reduce monthly obligations and allow some borrowers to remortgage by having an active lender.

4. Mortgage rescue

To avoid evictions, mortgage prisoners who can no longer afford their debts could remain in their houses as tenants, with housing associations buying their properties. They might then can buy their homes back later on.

5. Regulating unregulated lenders

As mentioned, many mortgage prisoners' debts belong to inactive lenders who can't hand out new mortgages. This means they do not come under the FCA's regulations.

Requiring all mortgage loan book proprietors to be authorised to give out new loans would change this, allowing the FCA to enforce regulation that could help mortgage prisoners. It has already been done in Ireland.

6. SVR caps

Campaigners have long said caps to SVRs would make life easier for mortgage prisoners. In July, a cross-party group of MPs asked for an SVR cap of 2% over the Bank of England's base rate (currently 0.1%). This would slash many mortgage prisoners' bills by countless pounds.

However, the LSE London research deems the measure 'superficially attractive', and says the difference between mortgage prisoners' SVRs and the higher risk mortgages they'd have the ability to change to is small. Despite this, it does acknowledge that some mortgage prisoners are paying much higher rates and that a cap is needed them.

Regardless, this is one potential remedy the government has rejected. Economic secretary to the Treasury John Glen wrote inside a letter last week that 'the setting of SVRs generally is a matter for lenders, in which the government plays no role', as Mortgage Solutions reports.

• Read more: MPs demand SVR cap to help mortgage prisoners

What do campaigners say?

The LSE London report acknowledges the limitations it was facing, saying it was difficult to find reliable data on how many mortgage prisoners there are and the rates they are paying.

Because of this, it does not provide information on how much any of its proposed solutions would cost. This hasn't gone unnoticed by campaigners.

Rachel Neale, lead campaigner of the UK Mortgage Prisoners group, said: 'UK Mortgage Prisoners want to thank Martin Lewis for funding the study and researchers at LSE for their attempts to find solutions. However, it's disappointing that a full cost/benefit analysis could not be conducted due to data limitations.'

'Through our very own reports, previous MSE reports, and now the broader outcomes outlined in the LSE report, the situation is now clear. The government must accept responsibility and act right away for those mortgage prisoners to remedy the issues it's created and sustained for a lot too long.'