Mortgage prisoners: is capping rates the solution?

Hundreds of a large number of homeowners trapped with mortgages they can't afford could face relief under new proposals from a cross-party group of MPs.

With lockdown easing, talk is popping towards the economic crisis that could come in the wake of the coronavirus pandemic, and just what decision-makers could do to alleviate it. But you may still find victims of the last great recession – following the 2008 crash – that are yet to get help.

Decisions around the way mortgages are purchased and sold left many homeowners stuck with sky-high interest rates, not a way to get them lowered and no money to settle them. Some are now vulnerable to eviction.

The All-Party Parliamentary Group (APPG) on Mortgage Prisoners has suggested capping lenders' standard variable rates (SVRs) in an effort to help.

Here, Which? compares the problems mortgage prisoners are facing and just how these new proposals could make a positive change.

What is a mortgage prisoner?

A mortgage prisoner is really a homeowner who can't get a lower interest rate through remortgaging. This can be a huge problem for those whose rates have risen to a level they are able to no longer afford.

The Financial Conduct Authority (FCA) estimates you will find 200,000 mortgage prisoners in the UK.

They're often customers of inactive lenders – sometimes called 'zombie banks' – that bought or were given existing mortgage loans from banks such as Northern Rock, which collapsed within the 2008 financial crisis.

These people are 'prisoners' because stricter affordability checks introduced in 2021 mean they cannot go and get a home loan from a different bank or building society.

How affordability checks keep people trapped

We've been told by several mortgage prisoners with rates of interest of around 5%. If you had a balance of lb200,000 left in your mortgage, with 25 years left to pay, that would mean monthly repayments of lb1,170.

Lowering that interest rate to 2% – roughly the average for a two-year fixed-rate mortgage – would lower repayments to lb848.

Clearly, this really is less expensive, but thanks to strict affordability rules, banks and building societies might tell you you 'can't afford' that cheaper rate, even if you've been paying above that for a long time.

It's an unintended results of an important change. The 2008 financial crash was allegedly caused, at least partly, by lenders granting mortgages too liberally – in some instances without checking whether customers could reimburse them. So it made sense for the FCA to ask banks to create tougher checks.

What continues to be completed to help mortgage prisoners?

The FCA has since made changes to those rules to help some mortgage prisoners escape. But campaigners say more must be done.

Being sold loans they couldn’t afford was particularly an issue for interest-only mortgage customers, where homeowners pay just interest each month and then pay the full price of their property in one go when their term comes to an end.

If other product other way of paying, these people will be forced to sell their homes.

Which? spoke to one mortgage prisoner whose house fell into negative equity (it's worth under it had been as he got it) throughout his interest-only mortgage, meaning even if he sells it, he'll still owe thousands to NRAM – the inactive lender that owns his mortgage.

Will SVR caps work?

Unaffordably high SVRs are a key ingredient in the dreadful recipe for a mortgage prisoner.

If you're not familiar with SVRs, they're the eye rate your mortgage find yourself having following the lower introductory rate expires. This can usually be after two to 10 years.

Unlike a set rate of interest, lenders can alter SVRs every time they like. They're often associated with another measure, such as the Bank of England base rate. But at the moment there's no limit on how high they may be.

The APPG is looking for any cap of 2% over the Bank of England base rate for those SVRs. With the base rate currently at 0.1%, this indicates a 2.1% cap.

If this cover was introduced, mortgage prisoners will finish up automatically paying hundreds of pounds less, without having to pass affordability checks. It can't necessarily 'free' all of them, however it will make life easier for thousands.

When is the SVR cap start working?

Rachel Neale, founder of the campaign group UK Mortgage Prisoners, said: 'The SVR cap should be brought in with immediate effect. The unfairness that we [mortgage prisoners] experience 12 years on shuts us out of the market the rest of the country uses.

'We need a cap so the minute rates are on the fair playing field by doing this will put more money back in UK mortgage prisoners' pockets, enabling us to experience our part in spending in to the economy to assist recovery.'

Seema Malhotra MP, co-chair of the group, said: 'Too many mortgage prisoners happen to be exploited when you are held on high standard variable rates and have seen their rate increased without any justification.

'The CMA and the FCA should intervene quickly to cap the interest rates being charged. The coronavirus has resulted in unprecedented stress on family finances and we need to help mortgage prisoners, including many key workers, get a better deal.'