‘Everyone is nervous’: Mortgage prisoners fear rate hike in UK | Mortgages
The ultra-cheap mortgage era appears to be drawing to a close as lenders do their cheapest deals in preparation for a Bank of England base rate hike. But it never started for thousands of borrowers. More than a decade after the financial crisis, these homeowners are stuck in the trap of paying well above average interest rates and unable to switch to a cheaper offer.
With predictions of a rise in the base rate before winter and rising other costs of living, many of these households – known as mortgage prisoners – are becoming concerned about how they will pay their monthly bills.
“Everyone is extremely nervous about the rate hike,” says Rachel Neale of the UK Mortgage Prisoners campaign group. “These people already have problems. Some use boards, others are about to take them back. “
A price war among lenders meant that until recently, if you had enough equity, you could tie yourself to an interest rate of less than 1%, while the average 10-year fixed interest rate had fallen to just 2.36%.
In contrast, those who stick to Standard Variable Interest Rates (SVRs) typically pay a rate of around 4.39%. Earlier this year MPs voted against a cap on SVRs that would have capped the amount lenders could charge to a rate of two percentage points above the base rate, which would have meant a current wage rate of 2.1%.
An increase in the base rate from 0.1% to 0.25% in either December or January was widely projected which would add about £ 12 to a mortgage of £ 150,000 a month. If the base rate increases to 1% and the lenders’ SVRs follow suit, the typical monthly home loan bill for the same property would increase by £ 71.
About 250,000 borrowers were thought to be mortgage prisoners, but earlier this year the city’s regulator, the Financial Conduct Authority (FCA), said it thought that number was an underestimate.
Many originally took out their home loans from lenders bailed out during the financial crisis, including Northern Rock and Bradford & Bingley, and have since resold their mortgages to another provider.
Most providers are “inactive”, which means they don’t offer new mortgages to switch to. Issues such as negative equity, an interest-bearing mortgage, missed payments, or changed circumstances have deterred people from switching to another lender despite intervention by the FCA.
Not only are the inactive lenders not offering new offers, but they also typically ask for higher SVRs than those of the mainstream lenders.
Paying a much higher interest rate than paying on the open market is not only frustrating, but it also affects other people’s finances.
“It’s not just the mortgage that is the problem: people can’t invest money for retirement,” says Neale. “When they go to a different type of lender, the fact that they are with an inactive lender creates a black cloud over them – they are basically with a debt collection company.”
Neale and some of the other members of the group helped more than 100 people renegotiate with their lenders over the past year, including one case where a desperate borrower was raised from a rate of 4.79% to 1.55%.
But they say more needs to be done to help the group and that the Treasury Department has let them down by allowing lenders to buy their mortgages with no guarantees of how much they will be charged .
Marc Jelfs and his partner are among those who have not been able to take advantage of the record low interest rates and are concerned about what will happen to their payments if the bank decides to act.
They took out a mortgage with Northern Rock in 2004. At that time it was possible to do a “self-assessment” – in which one only had to state the salary on the application form instead of proof of income – and like Marc was self-employed, they chose this option.
In November 2007, they were on the verge of closing a new deal with the bank when it was pulled – and then came the credit crunch. “We’ve been moved to a rate of 6.5% to 7%. My monthly payment was £ 1,100, interest only, ”says Marc. “It took three years and I got into debt with my visa.”
The family’s mortgage ended up in the bailed-out bank and then sold to a company called Cerberus, which bought up mortgages from the failed lenders. Despite guarantees that they can move on to better deals after the sale, borrowers like Marc found they were unable to move and stuck with the lender’s SVR.
“I now pay 4.18%, including a 0.25% discount, because I’m a good customer,” he says. “The interest is £ 682 a month and we have eight years on our mortgage. After that, my home will be taken from me. “
The interest rate is variable and can be changed at the discretion of the lender, and Marc fears an increase in monthly costs.
The house originally cost £ 110,000 and the family spent £ 50,000 on renovating it. It’s worth roughly £ 220,000-230,000 now so they have a lot of equity, but their damaged borrowing so far has told them not to even bother applying for a loan.
“We will have spent £ 280,000 on interest by the end of the mortgage and we will still owe £ 110,000,” he says. “My partner won’t even talk about it. She can’t believe that she could be homeless at 58. “
Seema Malhotra MP, a co-chair of the parliamentary group on mortgage prisoners, says the FCA and the government need to ensure borrowers have access to cheap fixed rates to give them security in repayment.
“In addition to the rising cost of living, mortgage detainees will have to hike their already high floating rates,” she says.
Earlier this year, the city regulator announced it would review the effectiveness of measures it has taken to make it easier for lenders to offer loans to mortgage detainees. These gave banks and building societies some flexibility in assessing affordability.
It also verifies the data it has on the number of mortgage holders and their payment. It is expected to report back later in November.
A Treasury Department spokesman said, “We know that not converting your mortgage can be incredibly difficult. Many borrowers may find it easier to switch to an active lender thanks to recent FCA rule changes.
“We will work with the FCA to review the effectiveness of these changes and see if other possible solutions can be found for these borrowers that are workable and proportionate.”
How a Lender Helps
Many borrowers have had difficulty switching, but a lender has taken mortgage prisoners in and helped them get a better interest rate. Jonathan Westhoff, managing director of West Brom-based building society based in the Midlands, says when the FCA introduced new rules to enable switches, “we just knew it was the right thing to do”. – it is completely geared towards our purpose. “
The company was the first to use the modified affordability tests and had to adapt its systems so that borrowers were not automatically blocked. “Even though it was at the height of the pandemic, my colleagues resolved this problem and we then formed a dedicated team to work on the mortgage prisoner cases as everyone is different and needs to be checked individually,” he says. Society has received “a steady stream of applications” from those affected, but Westhoff says it would like to hear more from them. “Some borrowers have saved up to £ 1,000 a month on their mortgage payments, which is an incredibly sizeable sum. and we are therefore sure that we can help a lot more, ”he says. Initially it was thought borrowers would go to larger lenders, but Westhoff anecdotally says it doesn’t seem to be and more needs to be done to raise awareness of the steps mortgage prisoners can take.
“We are very keen to stay close to the regulator’s review of the affordability of mortgages and continue to contribute wherever we can,” he says. “We understandably saw concern about the threat of soaring energy bills, but in some cases the effects of a mortgage prisoner in as little as a month can be more financially detrimental than a dramatic increase in energy bills; and these borrowers have to deal with both. “
Starting November 23, the company is offering mortgage prisoners a two-year fixed-rate contract from 2.19% for borrowing up to 75% mortgage lending value, which rises to 2.59% for 85% loans – both interest rates well below the SVR they pay probably. The offers have a fee of £ 499 but include free assessment and help with legal fees.
Westhoff adds, “We’re just a medium-sized lender, and when we first launched these products, we knew that because of our size, we could only do so much and it would take a whole industry to help can get more borrowers. Even so, we have significantly reduced the monthly payments of many borrowers who were mortgage prisoners and encourage anyone in the same situation to get in touch. “