Freeing the Mortgage Prisoners

The Conservative MP Kevin Hollinrake has written to Sainsbury's Bank boss to plead them not to sell their mortgage book to an unregulated bank. 23,000 mortgage prisoners created overnight holding mortgage debts of over £1.8 Billion. These people would be trapped and probably be charged exorbitant standard variable rates (SVRs) as most are on variable and would find it extremely difficult to remortgage elsewhere.

Mortgage Prisoners is a term coined by the FCA, our regulator, to describe mortgage customers who are entombed with their current lender who is no longer trading or lending. It's estimated that over 250,000 customers are in closed books or in non regulated banks.

Many are up to date with payments, the FCA reckons 170,000 are but find it problematic to remortgage because their affordability wouldn’t allow them to do so. When they applied, the affordability rules were much laxer than they are now. There was a saying that “anyone with a pulse” could get a mortgage then. Customers from the nationalised Mortgage Express, Northern Rock and Bradford and Bingley are good examples.

The other problem is that over 90,000 of these people are on interest-only deals with little or no repayment vehicle – ouch.

The FCA have arrived like the cavalry and are looking to free these prisoners. In their report in 2019 (the Mortgage Market Study), they called for the industry to rally round to help and at the same time, they stated they would relax the affordability rules under MCOBs for these customers.

Instead of looking at current affordability – income, essential expenditure and so on – customers can use the fact that they have maintained their mortgage payments, at high rates, for many years. Essentially affordability would be based on their track record of payments. Very pragmatic – well done FCA.

The market huffed and puffed a little. Small lenders, niche building societies have welcomed the idea and are cooperating, hoping to scoop up the cream of the customers. Larger lenders have turned their noses away as it doesn’t fit their production line factory lending philosophy.

Retirement Interest Only mortgages (RIOs) will see a resurgence in popularity as all the interest-only prisoners, threated with redemption, switch over to these never-ending interest-only mortgages. It’ll also circumvent the second income problem that RIOs currently have. Good news for everyone. And when they don’t want to make payments they can switch over to a hybrid roll-up scheme knowing full well that their house price has rocketed since they bought it in the early noughties.

A grand plan comes together, I bet the FCA wishes their strategy would be taken up by the larger lenders though, shame they can’t see beyond their production line ethos and take a tailored approach. But that’s the way the mortgage market is going with the main lenders – highly automated, human-less, production lines.

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