Concerns remain over how many could be offered new deals, however
New measures to help some of Britain’s 140,000 mortgage prisoners access cheaper deals have received a cautious welcome from the industry, but many questions remain over how effective the reforms will prove to be.
In a lengthy consultation paper published alongside its Mortgage Market Study at the end of March, the FCA revealed plans to allow lenders to use less stringent affordability tests for mortgage prisoners who are up-to-date with payments.
Under the proposals, lenders will be able to use a “modified assessment” for borrowers who are staying in the same property and have not missed repayments, as long as the new deal they are offering is more affordable than the customer’s current rate. However, there will be no compulsion on lenders to do this as the FCA accepts this is a commercial decision.
The FCA raised particular concerns about mortgage prisoners whose loans have been sold to “inactive lenders”, because these companies will not be able to offer them new mortgage deals on better terms.
In order to try and ensure mortgage prisoners with these lenders do not miss out, the FCA plans to require the owners or administrators of these loan books to contact borrowers and explain the rule changes. The details have yet to be confirmed, but the regulator proposes this will be a one-off communication to borrowers which signposts other sources of information. It suggests that it does not want to give borrowers who are unlikely to qualify for a better deal false hope.
While the changes were broadly welcomed by consumer champions such as Martin Lewis and industry bodies alike, many questioned whether banks would really want to take on the risk of offering new loans to mortgage prisoners from other lenders’ legacy books without the tough affordability checks they normally impose.
Just a week after the FCA set out its proposals for helping mortgage prisoners, the Treasury announced that it had agreed a deal to sell £4.9bn of former Northern Rock home loans to Citi – a bank not currently active in the mainstream mortgage market in the UK.
Commentators warned it was therefore unlikely Citi would want to offer mortgage prisoners within its newly purchased book a better deal, “making a mockery” of the regulator’s efforts to improve their fortunes, according to Coreco’s Andrew Montlake.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “The FCA proposals are a positive step forward. There is a climate politically in which the government wants something to be done for these borrowers, but whether lenders are prepared to play will be a choice for each of them.
“The bigger challenge is how do we make borrowers aware that there are now some options without setting an unreasonable expectation?”
John Charcol senior technical manager Ray Boulger says the FCA’s consultation could have gone further in trying to help mortgage prisoners who are trying to move home, as well as those looking to remortgage and stay in their existing property.
He says: “If you are going to have this exemption for people who want to switch, why would you not give the same flexibility to those who want to move too? There will be people stuck on a high rate who would like to downsize and save money, but current rules would prevent them from getting a smaller mortgage.”
Intermediary Mortgage Lenders Association executive director Kate Davies highlights further difficulties that the industry will face in trying to offer deals to some of the higher-risk borrowers stuck with pre-credit crisis home loans.
She says: “There will still be people who cannot be helped. I am sure lenders will look at it and there will be some that would quite like to be in that space who have the ability to underwrite manually and really crawl through each individual case, but it will take them time and resource.”
By the FCA’s own admission, very little is known about these customers, she says.
“They are off the radar and have been for some time. Their own circumstances may have changed a lot from the time when they took out the loan – they might have divorced, lost their jobs, be in negative equity. Others might be better off.”
However, she suggests that investors who bought the loans in good faith and are receiving high returns will not be happy about this.
Davies also challenges whether the FCA’s proposal that administrators of these loan books send out just one letter to tell borrowers about the changes will be sufficient.
She adds: “I cannot honestly see that being terrifically successful. It will hit a small percentage of people who actually open the envelope and decide to do something about it. For it to be effective there might need to be a much bigger campaign. Think of the money that was thrown at the PPI campaign.”