Only the Government can release the 250,000 mortgage prisoners it's failed - and coronavirus is a tipping point, so not acting now could devastate lives
A landmark report commissioned by MoneySavingExpert.com has put forward eight practical policy solutions to free 'mortgage prisoners', which the Government has committed to reviewing.
Update October 2021: The second part of the LSE report discussed below is now underway, again commissioned by MSE and funded personally by Martin Lewis. Its aim is to do the missing costings from the first report as there is now access to official sources (which couldn't be accessed for the first report).
The report was published by the London School of Economics (LSE) and funded by a substantial personal donation from Martin Lewis - who also chairs the Money and Mental Health Policy Institute.
It found that mortgage prisoners have higher rates of physical and mental health problems than the average borrower, and are up to 40% more likely to default as a result of coronavirus.
And while the financial regulator - the Financial Conduct Authority (FCA) - has adopted policies to help mortgage prisoners, it has now reached the limit of its powers in this area. This means only the Government can, and should, free mortgage prisoners, and the report sets out several possible actions it could take to solve the problem.
When the research was announced earlier this year, the economic secretary to the Treasury John Glen wrote to Martin saying he would give "full consideration" to the proposals.
Martin: 'There is a moral responsibility to free mortgage prisoners from their penury'
MoneySavingExpert.com founder Martin Lewis, who funded the LSE research, said: "Mortgage prisoners are the forgotten victims of the 2008 financial crash. The Government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since.
"The Prime Minister has touted the idea of subsidising 5% deposit mortgages for first-time buyers. Alongside that, there is a moral responsibility to release money to free mortgage prisoners from their penury. I was delighted when Treasury Minister John Glen agreed in advance to review any policy proposals the LSE came up with. The independent, practical solutions in this report leave no excuse for not tackling this, though as an urgent first step, the Government must agree to do the remedial work, using critical data it has access to, to cost the solutions up fully.
"Speed is necessary now, as coronavirus has torn through people’s livelihoods. But for people whose finances and freedom have already been destroyed for more than a decade, they had already met breaking point – they are now defeated. Nobody should underestimate the detriment to people’s lives and wellbeing if the Treasury doesn’t act, and act soon. Intervention can and will save lives."
What are mortgage prisoners?
So-called mortgage prisoners are homeowners who are unable to remortgage to a cheaper deal with another lender because they don't meet strict borrowing criteria brought in after the 2008 financial crash – even though they're generally keeping up with repayments and would often be paying less if they switched.
MoneySavingExpert has been fighting mortgage prisoners' corner since 2015, and has repeatedly called for the Government to take action. In January, John Glen suggested the Government was open to extending regulation to help mortgage prisoners – but it seems no practical steps have been taken.
What does the report say?
The LSE's report highlights the issues facing those trapped in their mortgages, finding that:
- Mortgage prisoners in "closed books" are up to 40% more likely than other borrowers on similar incomes to default due to coronavirus, according to modelling from the LSE.
Mortgage prisoners also face more barriers due to the pandemic, such as lenders becoming increasingly risk-averse and possible falls in property prices increasing the risk of negative equity.
- Mortgage prisoners have higher rates of physical and mental health problems, which are contributed to by the fact that mortgage prisoners are more likely than the average borrower to have general debt problems or be in arrears, and are often paying far higher than average mortgage rates.
Many mortgage prisoners have told MSE about the emotional and physical burdens of their situations, and the report stresses that solutions should prevent defaults, help people stay in their homes and help mitigate other debt problems.
- The FCA has gone as far as it can within its current powers to help mortgage prisoners, including relaxing affordability rules - but take-up of its measures has been slow, and the solutions it's able to implement can only help a small minority of mortgage prisoners.
- As a result, the report concludes that only the Government can free mortgage prisoners. And it argues that the Government has a moral responsibility to do so, especially as the problem was largely created by policies of different Governments.
This is because when mainstream lenders such as Northern Rock failed during the global financial crisis, many affected mortgages were taken into Government ownership and moved to a Government-owned holding company, UK Asset Resolution (UKAR) - which then sold many loans to non-mortgage lenders which couldn't offer customers a different, cheaper product.
What are its solutions to free mortgage prisoners?
In its report, the LSE has put forward eight practical policy solutions to free mortgage prisoners.
However, only the Government and financial regulator have access to data on UK borrowers to calculate the cost of the proposed measures accurately. The LSE and MSE are now urgently calling on the Government to use this data to assess the full cost and benefits of the proposals.
Here are some examples of the proposed measures:
- Interest-free Government equity loans. These could be used to bring down some mortgage prisoners' loan-to-value ratios and allow them to remortgage. This is similar to the Help to Buy scheme for first-time buyers.
- Mortgage rescue. This is where homeowners whose mortgages are financially unsustainable are able to stay living in their homes as tenants. The property would be sold to housing associations with a buy-back option later.
- Bringing all "closed book" mortgages under the oversight of the financial regulator. At the moment, owners of "closed book" mortgages - those borrowing from a firm that no longer lends to new customers - are outside the financial regulator's "regulatory perimeter", which is the line between what it can and cannot regulate.
Bringing closed book mortgages within the FCA's regulatory perimeter would be similar to measures in Ireland.
- Removing 'Together' loans as an obstacle. This is a former Northern Rock product which was taken out by many mortgage prisoners. The report says the secured and unsecured elements of the product could be uncoupled.
What do the mortgage prisoners say?
Rachel Neale, from the UK Mortgage Prisoners group, which campaigns for mortgage prisoners, said: "UK Mortgage Prisoners would like to thank Martin Lewis for funding the research and researchers at LSE for their attempts to find solutions. It is now abundantly clear that borrowers were ‘not to blame’ for taking out mortgage products with ‘household names’ such as Northern Rock and Bradford and Bingley. The responsibility lies largely with ‘successive Governments’.
"The financial and emotional harm sustained for over a decade has been devastating for mortgage prisoners. These consequences are well known by the Government; therefore it is now time to find a fair and ethical solution for all mortgage prisoners."