More of the UK’s mortgage prisoners have told of the financial and personal hardships they have suffered, in a bid to drum up support for a potntially life-changing new law currently going through Parliament.
There are estimated to be a quarter of a million mortgage prisoners in the UK, known as such because they have become trapped in high-interest home loans that they took out with lenders that went under during the 2008 crash.
Most are currently paying interest rates of around 4 to 5 per cent, reflecting temporary reductions due to Covid. However, some have told This is Money that they have paid rates as high as 9 per cent.
Mortgage prisoners find themselves trapped in high-interest loans that they took out before the financial crisis, and are often unable to switch deals or providers
In comparison, the rates being offered on new mortgages are at an all-time low.
The typical borrower walking into a bank today could come out with a rate lower than 1.5 per cent, if they signed up for a two-year fixed term and had a 25 per cent deposit.
After This is Money published an article highlighting the experiences of three mortgage prisoners last month, more got in touch to tell their stories.
They describe being sold interest-only or low-deposit mortgages in good faith before the financial crisis, usually with lenders like Northern Rock who were subsequently nationalised.
Some say the products were recommended to them by independent financial advisers.
Their mortgages were then sold on to private companies as investments, and when their fixed terms ended they dropped on to higher standard variable rates. They say they have been paying sky-high rates for more than a decade through no fault of their own.
As a result, they say they have suffered financial hardship, but also emotional distress including mental health problems and family breakdowns. Some even claim that the treatment of mortgage prisoners by lenders and the Government amounts to a ‘national scandal’.
Many have tried to escape their mortgages through negotiations with their lenders or others, but to no avail.
Mortgage prisoners find themselves unable to switch to a new deal despite the current climate of rock-bottom rates, because the companies that now hold their mortgages simply do not offer them.
And because banks and building societies now perform stricter affordability checks than they did before the 2008 crash, it is hard for them to remortgage with a different lender.
Campaign group the UK Mortgage Prisoners Action Group says most of its 4,000 members are paying rates at least 1.33 per cent higher than the average market standard variable rate – the default rate that borrowers drop on to when a fixed-term mortgage deal ends.
An amendment to the Financial Services Bill, which is set to be debated in the House of Lords next week, could lower the interest rates that mortgage prisoners currently pay
Change could be coming
There is hope that the situation could be about to change for mortgage prisoners.
A proposed law change currently making its way through Parliament would force the Financial Conduct Authority to put in place measures to help ease their financial burden, if it is passed.
The amendment to the Financial Services Bill, which is being put forward by Lord Sharkey, Lord Stevenson of Balmacara and Baroness Kramer, would introduce a cap on the standard variable rates charged to mortgage prisoners.
This would be no more than 2 percentage points above the Bank of England’s base rate, which would currently make it 2.1 per cent.
According to the action group, some of its members would see their monthly bill plummet by £800 if this was the case.
The amendment also proposes that mortgage prisoners be able to access new fixed mortgage deals, at an interest rate equal to or lower than an interest rate specified by the FCA.
To do this they would need to meet certain requirements such as not having arrears of more than one month in the last 12 and having an outstanding loan of at least £10,000.
The bill is set to have its third reading in the House of Lords on 12 April, after which it will be sent back to the House of Commons to allow MPs to consider the amendments.
This is the final stage before the bill is granted royal assent and becomes law.