George Osborne has written to mortgage lenders following a meeting with MoneySavingExpert.com founder Martin Lewis last week about the plight of so-called 'mortgage prisoners'. However, Martin believes the Chancellor's letter only addresses "a fraction of the problem".
The Chancellor's letter urges lenders to use temporary arrangements which allow affordability checks to be waived – to prevent borrowers being trapped on their existing mortgage deal.
But Martin has reiterated his stance that it's important that a competitive mortgage market is created so people don't become 'mortgage prisoners', trapped into using their existing lender.
New rules introduced in April 2014 after the Mortgage Market Review (MMR) mean that anyone getting a mortgage is subject to strict affordability checks scrutinising their incomings and outgoings. This is to check they'll be able to repay not just at their current mortgage interest rate, but at rates of 6% or 7%.
Although the rules are intended to stop people taking out mortgages they can't afford, they're also applied to those who already have a mortgage – meaning some are being told they can't afford a cheaper mortgage, despite their circumstances not changing.
While welcoming the fact that Osborne took on board what he had to say about affordability checks being waived for existing customers, Martin believes more needs to be done.
He says: "It's good to see the Chancellor listened in our meeting last week about the large-scale worry about mortgage prisoners, but this letter is unfortunately only addressing a fraction of the problem.
"While reminding lenders that they can waive affordability checks for their existing customers looking to get better deals, what we really want is to see a proper competitive market so that people aren't trapped into only using their existing lender.
"It is palpable nonsense to reject somebody on a 5% mortgage, telling them they can't afford a 3% mortgage. That is happening day after day. We need to recalibrate our affordability checks to stop trapping people on high rates in the ridiculous pretence it's protecting them."
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What did the Chancellor's letter say?
Osborne's letter was sent to lenders this week and states that it's "important that consumers are not prevented from accessing the financial services that they need and can afford".
It goes on to clarify that the Financial Conduct Authority (FCA) "allows lenders to waive affordability assessment requirements where an existing customer wants to make a change to their mortgage and is not taking on additional debt".
How have other mortgage industry experts responded?
Patrick Bunton, a director at mortgage broker London & Country, told MSE he has a meeting at the Treasury today (19 May) to discuss his concerns that mortgage prisoners are being denied the opportunity to "vote with their feet" as they are being locked in to their existing lender.
While welcoming the Chancellor's observation of the "absurdity" of an existing borrower, who has not missed payments, being told they can't afford a new mortgage at a lower rate, Bunton suggested that Osborne may have been "led up the garden path" and that he may not have been given all of the facts.
Bunton says: "Ever since the new rules were brought in, lenders... [have been] implementing transitional provisions [which allow affordability checks to be waived] for existing customers, but not new ones. This is wrong as transitional provisions were designed to cover both types of borrower."
Regulator's report stops short of concrete action on mortgage prisoners
In a report published on Monday, the financial regulator admitted mortgage lenders "could be more proactive" in making sure homeowners don't become mortgage prisoners. But it failed to outline any concrete proposals to fix the problem.
In its report, the FCA looked at how companies are applying the responsible-lending rules and concluded: "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."