Some mortgage customers who took out their mortgage before the financial crisis started in 2007/8 and who are up to date with their repayments would benefit from having a new mortgage deal but are finding that they cannot move.
These borrowers may have been on a fixed rate or discount mortgage which came to an end and they were then moved onto a new interest rate by their lender – the rate they move on to is sometimes called a Standard Variable Rate or more commonly a reversion rate.
Typically few borrowers stay on these rates for long with most choosing to move onto a new mortgage product – generally a new fixed rate mortgage. A relatively small group of borrowers have got stuck on these reversion interest rates and they are sometimes described as ‘mortgage prisoners’.
The relevant regulator - the Financial Conduct Authority (FCA) estimates that there are around 10,000 of these customers with active mortgage lenders. This is based on data that was collected from lenders in 2016 so is an estimate.
Why can’t these borrowers move?
To ensure that consumers can afford the mortgage that they apply for, the FCA introduced new affordability rules back in 2014. These require lenders to check income and expenditure and make sure that borrowers can afford to repay the loan they apply for not only at the current rate but if interest rates were to rise. You can find more details about the regulators Mortgage Market Review at: http://www.fsa.gov.uk/about/what/mmr.
Some borrowers who took out a mortgage before these rules came into effect cannot satisfy these affordability rules which has been an issue.
What is happening to help?
At the end of July 2018 a cross-industry voluntary commitment was announced by the Building Societies Association (BSA), UK Finance and the Intermediary Mortgage Lenders Association (IMLA). Initially it covered 53 authorised mortgage lenders which between them represented over 93% of the UK’s mortgage market mortgage market – since then other lenders have signed up too and you can see the full list of lenders in Note 1 here.
Working closely with the FCA, these lenders have agreed to help existing borrowers on reversion rates who are up-to date with repayments but because of stricter affordability criteria are currently ineligible to move to an alternative product provided by their lender.
This commitment applies only to customers of those lenders that are able to offer alternative products to their existing borrowers and it is not a contractual right. A number of lenders already offer their existing customers the opportunity to switch. However lenders which have signed up to the voluntary agreement have undertaken to write to any qualifying borrowers by the end of 2018 if they haven’t already done so.
Customers do not need to take any action and will not be obliged to switch if they do not wish to do so.
To qualify customers will need to:
- be first charge owner-occupiers
- be existing borrowers of an active lender
- be on a reversion rate
- be looking for a like-for-like mortgage (same amount, same property, same borrowers)
- be up to date with payments
- have a minimum remaining term of 2 years
- have a minimum outstanding loan amount of £10,000
There are some exclusions:
- Any change to the terms of the mortgage which is likely to be material to affordability would be excluded e.g. additional borrowing, change of term, adding or removing a party to the mortgage.
- Overseas properties - only mortgages on properties in Great Britain and Northern Ireland are included in this agreement.
- Arrears – customers who have aggregate arrears of more than one monthly payment in the past 12 months are not eligible.
- Discontinued products – firms do not need to replicate like for like e.g. if they no longer offer particular products (such as Sharia compliant products, etc.).
- Permissions for commercial lets – the agreement will not apply where consent to let has been given.
- Securitisation/closed books – while not a total bar on moving borrowers to a new product, some active lenders may not be able to offer new products immediately due to regulatory and/or legal constraints.
Who isn’t covered by this voluntary agreement?
This commitment is focused on customers with active lenders initially, with a view to further consideration of what might be possible for the estimated 20,000 customers with inactive lenders (lenders who no longer lend) and the 120,000 customers with unregulated mortgage owners identified by the FCA, who are not BSA, UK Finance, or IMLA members.