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Regulator proposes new rule change to help more mortgage prisoners – but lenders won't have to apply it

Regulator proposes new rule change to help more mortgage prisoners – but lenders won't have to apply it

The financial regulator has proposed a change to its rules which could make it easier for 10,000s of borrowers in 'closed mortgage books' to switch to a cheaper deal – though it will be up to lenders whether they actually carry out the change.

Currently, many mortgage borrowers in 'closed books' – ie, those borrowing from a firm that is no longer lending to new customers – struggle to switch away because of tight lending criteria, and are stuck on expensive rates.

The proposed rule change from the Financial Conduct Authority (FCA) would make it easier to switch to a new mortgage deal with a firm that is part of the same financial group as your current lender, as you wouldn't have to undergo the usual rigorous affordability tests. This would mirror the flexibility that active lenders – those that do lend to new customers – have under existing rules.

As with past mortgage prisoner rule changes though, the FCA cannot make lenders apply these rules. The FCA says, of the 250,000 mortgage prisoners in the UK, 63,000 would be affected by the guidance, and it estimates 25,000 would be able to access cheaper deals as a result. But only a small proportion of these would do so. The consultation on the proposed rule change is set to end on Tuesday 8 September.

'Mortgage prisoners' are homeowners who are unfairly trapped on an expensive mortgage, often with inactive lenders that have no other mortgage products, or firms that are not authorised to offer new products. They're unable to remortgage to a cheaper deal with another lender because they don't meet strict borrowing criteria.

MoneySavingExpert.com has been fighting their corner since 2015. Most recently, in February 2020, Martin commissioned the London School of Economics and Political Science to find evidence-based policy solutions, to push the Government to step in and rescue those that the financial regulator can't reach. Others, such as the UK Mortgage Prisoners group, have also been campaigning for change. 

The FCA has also announced that it will be working with the Money and Pensions Service to create online guidance and a dedicated phone line for mortgage prisoners.

See our Mortgage Essentials section to find the right mortgage for you.

'The FCA's proposed measure has no real teeth'

Will Barnes, campaigns and policy editor at MoneySavingExpert.com, said: "While we hope this change does help to free some mortgage prisoners, there is a serious flaw in the plan – the FCA's proposed measure has no real teeth because closed-book lenders don't have to apply it.

"The worry is that if lenders are given the choice of voluntarily helping mortgage prisoners, they will respond with inaction, as they have done before. The proof will be in the pudding, and MSE will be watching closely to see whether lenders step up to the plate.

"The FCA also revealed that 88,000 mortgage prisoners can already switch to a better deal, but probably don't know it yet. It had planned to help these borrowers earlier this year, before changing its plans due to coronavirus. While coronavirus has put an unprecedented strain on the regulator, it has also put a strain on many mortgage prisoners, who are often in very vulnerable circumstances. We hope this important work can be done urgently."

New data on mortgage prisoners also published

The FCA has also published new data on mortgage prisoners, which shows:

  • Of the 250,000 mortgage prisoners in the UK, 125,000 would find it difficult to switch. This is because lenders wouldn't want to risk lending to them. The FCA says the majority of this group (77,000) are not up to date with payments and the other 55,000 would have little to gain from switching on the whole. On average, those up to date with payments are paying 0.4 percentage points in interest more than similar people in the open mortgage market. However, 30,000 of those up to date with payments are 'most impacted' by paying more than they need to. 
  • There are also 125,000 with inactive lenders who should be able to remortgage. While around a third (37,000) would not benefit due to being on a low interest rate, up to two-thirds (88,000) could benefit from switching. The FCA had planned to publish a consultation paper with proposed help for this group but this was delayed due to coronavirus, and it now plans to publish it this winter instead. 

  • Lenders' plans to offer new switching options using the modified affordability assessment have been delayed by coronavirus. The FCA says lenders are less willing to take risks because of the pandemic, but it still expects them to introduce the modified assessments in time.

  • The FCA has investigated the potential to take on greater powers to help mortgage prisoners, but found this would only help the minority. MSE has previously called for the FCA to have its remit extended so that it can protect mortgage prisoners whose loans have been sold to unregulated firms, a call that was also made by the Treasury Committee and the FCA itself at the time.

    However, the FCA now states that extending its powers over these firms would only help a minority of mortgage prisoners. It says new evidence shows that the majority of unregulated firms actually voluntarily delegate key decisions about customers – such as interest-rate setting and forbearance measures –to regulated firms.

Other new measures to help those hit by coronavirus 

The FCA has also said it is consulting on new guidance to help some borrowers with maturing 'interest-only' and 'part-and-part' mortgages who are affected by the conditions created by coronavirus.

It proposes that firms should allow maturing or recently matured interest-only or part-and-part mortgage-holders who are up to date with payments to continue making interest payments and delay repayment of the capital on their mortgage up to 31 October 2021, if they need this. This change is aimed at people who may have been disadvantaged by coronavirus, for example, if it has affected their repayment strategy. For more details see our  Coronavirus Finance & Bills Help guide.