If you cannot leave your current mortgage because your financial circumstances have changed, you are what’s termed a ‘mortgage prisoner’.
Your new financial situation could prevent you from passing a new lender's affordability checks. It means you're trapped in your existing mortgage even if a remortgage would get you a cheaper deal.
This can be a big problem if you have a large mortgage or you’re on your lender's standard variable rate (SVR).
The first big wave of mortgage prisoners emerged after the 2008 global financial crisis. Before that, banks were prepared to offer much bigger mortgages – some as large as 125% of the property value – as they were keen to attract as much new business as possible.
Prior to the 1996 property price boom, the average price of a UK home was £51,000, about three-and-a-half times the average salary of £14,500. The maximum amount you could borrow was about four times your salary, and for this you'd need a deposit of at least 10%.
By the early 2000s, 100% loan-to-value (LTV) mortgages were common, self-employed people could self-certify their income, and banks were prepared to lend up to eight times your annual salary. As a result, many people borrowed heavily.
With house prices rising much faster than salary growth, the gap between earnings and home values quickly grew. By 2006, the average house price was up to £160,000 but the average income had risen to only £20,400.
Following the 2008 financial crisis, the UK’s financial regulator ordered a review to tighten mortgage lending rules.
As a result, borrowers had to pass strict affordability checks before they were approved for a mortgage. Lenders scrutinised their customers’ credit files to be sure they could afford to meet their monthly mortgage repayments.
When homeowners who'd previously borrowed heavily tried to negotiate a new mortgage deal, lenders turned them down.
The dramatic reduction in interest rates meant there were some very cheap mortgage deals on the market, but many people who failed the new affordability checks were unable to benefit from them.
Meanwhile, some borrowers who had interest-only mortgages discovered they had little or no equity in their property. They had originally borrowed at very high LTVs and had been paying off only the interest, so they fell foul of the affordability rules when they tried to switch deals after the mortgage lending rules had been tightened.
Although the financial crisis was the catalyst, it hasn’t been the only thing that has created mortgage prisoners.
The maximum mortgage you can get is based on:
The ratio of your earnings against the property price
Any equity you might have from a deposit
An increase in property value if you’re remortgaging
If any of these factors change, it potentially affects how mortgage lenders treat you.
For example, if you lose your job or take a pay cut after taking out your mortgage, you might struggle to remortgage, and that would make you a mortgage prisoner. To make things worse, it’s likely that you’d end up languishing on your lender’s SVR, making it even harder to improve your financial situation.
If you are a mortgage prisoner, you can help yourself by doing the following things:
Overpay your mortgage and attempt to pay off your mortgage early - Check with your lender how much you can overpay without being charged a penalty fee.
Increase your equity - The proportion of your home that you own, otherwise known as your equity, makes lenders more likely to lend to you and raises your chances of qualifying for better mortgage rates.
Get a pay rise - This can increase the maximum amount you can borrow.
Reduce other debt and outgoings - This could also help you pass a lender's affordability check, making your acceptance for a cheaper mortgage more likely.
Consider downsizing to a smaller property or moving to an area with cheaper property prices
In May 2018, the FCA said it wants lenders to do more to help trapped borrowers.
It estimated there are 30,000 homeowners stuck on expensive mortgage rates who cannot switch but admitted there are another 120,000 who have mortgages that have been sold off to investors who do not offer mortgages.
The FCA suggested that some of these borrowers should be allowed to switch to a cheaper mortgage with their existing lender without undergoing full affordability checks.
In August 2018, a group of 59 authorised lenders (who account for 93% of the UK residential mortgage market) agreed to help up to 10,000 mortgage prisoners who have mortgages with authorised lenders.
This, however, did not help the 120,000 mentioned above or a further 20,000 who had mortgages with inactive lenders. Eligible customers were identified and contacted, but they did not have to switch.
Finally, between March and June 2019, the Financial Conduct Authority (FCA) launched a consultation on the issue, which resulted in new guidance. It stated that mortgage prisoners can be released from their shackles if they are:
Up to date with their payments
Remaining in the property
Not planning to borrow more money
If you took out your mortgage before 2014, always make your payments on time and are now finding it hard to switch to a better deal, speak to your lender – they should be able to offer help and advice.