They would become trapped by loans taken out during the boom years, according to the Financial Services Consumer Panel.
The FSA proposals would increase the number of home owners trapped in an existing mortgage’ deal, who faces being refused by all lenders, including their own, when their current deal ends and they need to remortgage.
Typically, they have a small deposit, have an interest only deal, or are in negative equity, which means their loan is larger than the value of their home.
The rules also potentially exacerbate the current lending drought and the panel is calling for the FSA to address the potential harm being faced by mortgage prisoners.
The Panel, in its response to the Mortgage Market Review (MMR) consultation, has called for the FSA to strengthen its transitional arrangements for borrowers whose current mortgages may fall foul of the proposed new rules if they attempt to re-mortgage and to apply these protections immediately.
The vulnerability of mortgage prisoners has been highlighted recently following the increase in a number of lenders’ standard variable rate (SVR). The Panel believes that the FSA should introduce a new rule specifically to protect these consumers.
Additionally, the Panel has said that unless the FSA is fully confident on the basis of solid empirical evidence that consumers would not be harmed by prompt implementation, the new responsible lending requirements for the whole market should not be brought into effect until the housing market has demonstrably recovered.
‘The FSA is undoubtedly right to bring forward proposals for stricter regulation of the mortgage market given the chaos which has resulted from weak regulation of our financial system,’ said Adam Phillips, Consumer Panel chairman.
‘Although we still have some suggestions for improvements, overall we are very pleased with the FSA’s proposals and the progress made from the initial consultation. The FSA must be praised for having listened to both industry and consumer groups,’ he pointed out.
‘However, we remain extremely concerned that many people, in particular those affected by the recent rises in lenders’ SVRs, will find the increase in their monthly mortgage repayments financially challenging. These increases are inconsistent with the principle of Treating Customers Fairly and could be addressed if the FSA were to consider introducing a new rule as we suggest. Otherwise significant numbers of consumers stand to suffer detriment,’ he added.
