Tesco mustn’t create mortgage prisoners

This week Tesco announced it’s going to stop lending new mortgages, and it’s also going to sell on the mortgages it already has with its customers, so that they’ll be owned and managed by a different firm. Although Tesco promises the original T&Cs will remain the same, this decision to offload the loans is sounding off alarm bells.

The unease comes from the fact that Tesco could create a new group of mortgage prisoners by selling these mortgages to a company that doesn’t offer new products.

For Tesco's (soon to be) ex-customers, this would mean that when they reach the end of their fixed deal, their only remortgaging option would be with other providers. Usually that wouldn’t pose a huge problem, because they’ll simply switch to a different lender at that point. But sometimes, for a variety of reasons, this might not be possible. In these cases, they’d be stuck on the expensive Standard Variable Rate (SVR) indefinitely – i.e. they could be a mortgage prisoner.

Here comes the techie bit... For many, the reason they can’t get a new deal with a different lender is because they took out a mortgage – perfectly legitimately – before the financial crash, when the required affordability checks weren’t as strong. Then, in 2014, the rules changed, and they now don’t qualify. As Tesco only began selling mortgages in 2012, this type of mortgage prisoner might be less common among its customers. But borrowers could still be stuck if, for example, their circumstances have changed since they took the mortgage out.

Helpfully, lenders don’t have to apply affordability rules on their existing customers – but this doesn’t help when the firm that end up ‘owning’ a mortgage doesn't have any new products to offer. This is why many former customers of Northern Rock and Bradford and Bingley have already become mortgage prisoners, as their loans are now owned by investors.

This problem is more than a boring, regulatory issue. Being a mortgage prisoner can cause real harm for consumers. It means people are paying hundreds of pounds more each month than they would do if they were able to switch deals. This obviously has huge knock-on effects on household finances, which feed through to all areas of life, including mental health. It’s because of this that the financial regulator is looking at taking action to help – but that’s a longer-term process.

In the meantime, following Tesco’s announcement, a group of MPs and Lords have written to the Tesco Chief Executive to ask for a commitment that it will not risk inflicting this harm on its customers, by only selling the mortgages on to a firm that can also offer new products. MSE has campaigned to help mortgage prisoners for several years – and it’s good to see others also picking up the mantle and holding to account the powers that be.

Read the full letter from MPs and Peers, led by Seema Malhotra MP and Lord John Sharkey.

At this point, it’s not clear what Tesco is going to do. But for its affected customers, it’s urgent and vital that Tesco does the right thing and quickly gives assurances that it will act responsibly.

In a nutshell, Tesco must only sell its mortgages to a firm that is able to offer competitive new deals when existing ones run out. Anything else risks potentially huge harm on its own customers, by creating a whole new raft of mortgage prisoners – and it’s not their fault that Tesco doesn’t want to sell mortgages anymore. I hope that Tesco will do the right thing by its customers.

MSE's mortgage prisoner campaign timeline

Here's a flavour of what MSE has been doing over the years to campaign for justice for mortgage prisoners...

In 2015, Martin met key figures in the EU, the Treasury and the FCA, which are the organisations responsible for UK mortgage regulations.

In 2016, then-Chancellor George Osborne wrote to mortgage lenders following a meeting with Martin about the plight of mortgage prisoners.

However, Martin said the Chancellor's letter only addressed "a fraction of the problem".

In May 2018, the FCA found 150,000 consumers in the UK were mortgage prisoners. MSE contributed to the regulator's discovery by suggesting and helping facilitate a survey of mortgage brokers. The survey backed up the regulator's findings from analysing mortgage data, and the FCA thanked MSE for its contribution.

The regulator said it was able to help 30,000 of the mortgage prisoners it identified – whose lenders the FCA could force to help their 'imprisoned' consumers if needed. But the other 120,000 'prisoners' have had their mortgages bought by firms who aren't authorised to lend, and so the FCA has no power to make them do anything.

In October 2018, Treasury Minister John Glen admitted that mortgage prisoners "need to be dealt with" at an event run by MoneySavingExpert.com at the Conservative Party Conference.

The minister also expressed agreement with Martin's call that an affordability check for someone with an existing mortgage – if it's at a cheaper rate and they're not borrowing more – should be: 'Have you repaid and not defaulted?'.

In March 2019, the Financial Conduct Authority launched a consultation detailing its solution to free mortgage prisoners. The Campaigns team at MSE is currently working hard on its response.