The Financial Conduct Authority (FCA) has announced new proposals to assist homeowners held in their current mortgage deals.
The new rules will allow lenders to workout more lenient affordability checks for ‘mortgage prisoners’ who have thought it was hard to remortgage.
For homeowners stuck on interest-only deals and not able to pay off their loans, this may be particularly helpful.
Find out how the proposals may affect you, and what you want to do if you are can not remortgage to some better deal.
What are mortgage prisoners?
Before the 2008 economic crisis, the guidelines around mortgage lending were a lot more relaxed, and lenders ran less stringent affordability tests when they were deciding how much to provide – however, tighter regulations mean lenders have to be much stricter.
This leaves thousands of homeowners trapped on old handles excessive charges, not able to remortgage to some better deal and effectively converted into ‘mortgage prisoners’.
Say you were approved for any mortgage with repayments of lb400 prior to the 2008 crisis. If you’ve met every repayment on time, you may think that you’ve proved that you could afford this amount each month.
But recent responsible lending regulations could make it difficult for you to be authorized for any lb300-a-month mortgage, despite it being less than what you’ve gone over with you are able to afford.
The FCA’s new proposals aim to help people in situations like this.
What the FCA is proposing
The main goal of the FCA’s proposed rule changes is to ensure consumers who're unable to switch are given ‘fair treatment’.
In practice, what this means is allowing lenders to do a modified affordability assessment for would-be switchers who have made all their payments promptly and are not asking to gain access to more.
Lenders will be able to make their very own judgment calls that customers should be given the modified assessment on a case-by-case basis.
The FCA estimates there were around 30,000 mortgage prisoners with authorised lenders across the nation in 2022, many of whom may potentially be ‘freed’ underneath the new rules. There could be as much as 150,000 mortgage prisoners when other lenders are included.
The final rules is going to be published at no more this year, having a view to them entering force shortly afterwards.
Who these new guidelines will help
Loosening these regulations have a liberating effect on thousands of customers, including:
Long-term mortgage prisoners
People who have been struggling to switch to cheaper mortgage deals for years will feel an enormous relief.
When the rules come into place, these customers should immediately think it is easier to get a better deal.
Under pre-crisis rules, you might have been accepted to have an interest-only mortgage – in which you repay just the interest, not the actual loan every month – even though you didn’t have a plan for how you would repay the capital.
If this applies to you, the FCA’s new proposals could be the difference between a strict affordability make sure that results in your house being repossessed when your mortgage term expires, and a more proportionate make sure that allows you to switch.
Getting a cheaper mortgage deal may even help interest-only mortgage prisoners repay some of their actual balance.
Cheaper repayments allows you to definitely overpay your mortgage (perhaps by the difference between your old deal as well as your new deal) and pay off the loan month by month.
And, if you’re nearing retirement, a retirement interest-only mortgage might be another viable option.
People with inactive or unregulated lenders
As a part of these proposals, the FCA is also urging unregulated and inactive lenders to contact customers whose introductory rates are gone for good, and who have been up-to-date on repayments for Twelve months, to let them know they are able to switch.
People with mortgages from all of these lenders are at chance of becoming mortgage prisoners, as switching would require passing an active lender’s affordability checks.
Potential mortgage prisoners
Thousands of those that these proposals will help may not even realise they’re affected.
In most cases, you do not discover you are a mortgage prisoner until you're applying to remortgage.
Thankfully, under the new system, whether you'd happen to be a home loan prisoner is a moot point, as switching should be less of a struggle.
Why should you switch mortgages?
Even if you can easily afford your current repayments, remortgaging once your initial period ends is nearly always advisable.
This happens because your lender’s standard variable rate (SVR) – the speed you’ll usually revert to whenever your promotional period ends – will probably be higher than the introductory rate on a new mortgage.
On surface of this, you’ll have in all probability built up more equity in your home, to be able to borrow in a lower loan-to-value ratio (LTV) – meaning cheaper deals.
Which? research on remortgaging in 2022 found that homeowners on SVRs could save around lb4,000 a year – that’s a lot more than lb300 a month – if they switched towards the cheapest equivalent deal.
The FCA estimates there are around 800,000 individuals who could switch to a less expensive mortgage but haven’t.
Editor’s note: this page continues to be updated with new data.