The financial regulator has admitted mortgage lenders "could be more proactive" in making sure homeowners don't become so-called 'mortgage prisoners', who are told they can't afford a cheaper mortgage deal. But its report published today stops short of outlining any concrete proposals to fix the problem.
MoneySavingExpert.com's been campaigning to highlight the problem of 'mortgage prisoners' for more than a year, with founder Martin Lewis meeting Chancellor George Osborne last week to discuss the issue. Martin has also raised the matter with the FCA and the EU Commission.
New rules introduced in April 2014 following the Mortgage Market Review (MMR) mean that anyone getting a mortgage is subject to strict affordability checks scrutinising their incomings and outgoings to check they'll be able to repay not just at their current mortgage interest rate, but at rates of 6% or 7%.
While the rules are intended to stop people taking out mortgages they can't afford, they are also applied to those who already have a mortgage – meaning that some are being told they can't afford a cheaper mortgage despite their circumstances not changing.
Now the Financial Conduct Authority (FCA), which carried out the MMR, has acknowledged the problem in a new, market-wide review published today. It looks at how companies are applying the responsible lending rules and concludes: "Most lenders are using the flexibility afforded by our rules when dealing with their own existing mortgage customers. However, some firms could be more proactive and consistent when making use of exceptions."
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'A self-made problem the FCA is glossing over'
Martin says: "There is a mortgage ticking time-bomb in the UK. While mortgages look cheap, in truth they're incredibly expensive.
"The average standard variable rate is 4% higher than UK interest rates – before the credit crunch this margin was just 1.5%. That means if interest rates rise, millions will simply be unable to afford to repay. This problem is accelerated by the fact that you now need far more equity in your house to be able to shift to a cheap deal, meaning many are mortgage prisoners trapped on high rates.
"That is difficult enough to fix, but now we have an additional self-made problem that's exacerbating it, and sadly the FCA is just glossing over it, limply telling firms they could be 'more proactive' in making use of flexibilities and exceptions. In practice, many apply for remortgage deals but are rejected and ridiculously told 'you can't afford a cheaper deal', as they fail the FCA's affordability tests which don't take account of the fact people already have the debt.
"This happens even where people aren't borrowing more and their circumstances haven't changed. This makes no sense and the rules need changing. Last week I met the Chancellor on this and he's promised to look into it – we need to stop this issue before it becomes a full-blown crisis."
Further criticism for the FCA
The CEO of the Association of Mortgage Intermediaries (AMI) Robert Sinclair backed up Martin's criticism of the FCA regarding its apparent lack of appetite in addressing the issues facing mortgage prisoners.
He says: "It is great news that the FCA has found that the mortgage market is now lending responsibly and that there are no issues with mortgage prisoners. This appears at odds with broker experience and that of the renowned consumer champion Martin Lewis, so no doubt the Chancellor will be assured by the FCA there will be no issues when interest rates rise.
"Some might applaud the FCA decision to challenge the results of its own MMR, but AMI is concerned that this will only introduce uncertainty into what is still a fragile market."
What are the new mortgage rules?
The EU Commission and the FCA have previously blamed each other for the sorry state of affairs that has seen people being ridiculously refused the opportunity to remortgage with a cheaper deal.
The rules introduced in April 2014 off the back of the MMR included provisions designed to fit in with the new EU Mortgage Credit Directive rules, which officially came into effect in March 2016, but in practice had an impact much earlier.
Although the FCA claims most lenders adopt a flexible approach when dealing with existing mortgage customers, EU rules don't allow lenders to waive affordability checks – meaning more people trying to remortgage could be stranded on their expensive SVR (standard variable rate) – the rate most home loans revert to after an introductory period.
The FCA says that customers looking to make a change to their mortgage and who are not borrowing more money may, in some circumstances, be able to move to better deals with their existing lender without passing an affordability check. However, this lenient approach isn't applied if you're looking to switch lender.
Previously, lenders had a transitional right to waive affordability criteria on remortgages where there's no increase in borrowing. This transitional arrangement ended in March.
This means people are being told they can't afford a cheaper mortgage despite no change in their circumstances.
What has the FCA now said?
The FCA report published today says: "Most lenders are using the flexibility afforded by our rules when dealing with their existing mortgage customers who want to make changes to their loan.
"However, we are encouraging some firms to improve their decision-making process for these customers, because where firms are prepared to use flexibility in our rules, they are not always doing so early in the process. In particular, some firms could be more proactive and consistent in using exceptions to the responsible lending requirements for existing customers.
"Whether or not firms choose to apply the exceptions, firms should consider the fair treatment of customers when they want to make a change to their mortgage. In doing so, firms should ensure that customers do not face unreasonable barriers to changing product."
Meanwhile, the report also found that some lenders are unnecessarily putting customers through full affordability checks.
It states: "We have seen that lenders deal with their existing borrowers in different ways. Some lenders have implemented processes that flag or re-route eligible customers to help ensure that flexibility offered by our rules is used at the earliest possible stage.
"By contrast, other lenders conduct a full affordability assessment initially, even when not required to do so by our rules. However, if a case is declined, this is often reassessed by an underwriter, and this could result in the decision being overturned. In a limited number of cases we saw that customers had to appeal before the application was reassessed by an underwriter."