Lending rules to change to help UK home owners who are mortgage prisoners

Lending rules set out by the UK’s financial watchdog are set to change to help some 140,000 home owners who are mortgage prisoners, unable to switch to a better deal with another provider.

The Financial Conduct Authority (FCA) has written to the Treasury Committee confirming that there are around 120,000 with firms that are not authorised to lend who could benefit from switching but cannot do so and 20,000 with firms that are inactive and no longer lending.

In addition there are 10,000 mortgage customers with active, authorised lenders who are also unable to switch to a better deal for various reasons. They are being actively encouraged to take advice to switch.

For these borrowers an agreement is now in place with UK Finance, the Building Societies Association and the Intermediate Mortgage Lenders Association that allows borrowers on a reversion rate to move to a better deal with their existing lender where they meet certain criteria.

It is thought that those with inactive or unregulated lenders are most likely to be borrowers with interest only mortgages and mortgages with high loan to value ratios. Many cannot meet the new, stricter, mortgage lending criteria introduced in recent years although they are not behind with payments.

‘We want to remove potential barriers to our rules to these customers switching to a cheaper mortgage. We will consult on changes to our responsible lending rules, with the aim to deliver a more proportionate affordability assessment,’ the FCA says in the letter.

This would mean that the test would be whether the new mortgage costs are more affordable than the current mortgage costs. ‘Our focus will be on those customers who are seeking to more to a cheaper mortgage and are not borrowing more to ensure that a new mortgage is more affordable for these customer,’ it adds.

But the FCA points out that the mortgage industry needs to be willing to offer products to these kind of customers once the barrier have been removed. However, it also warned that there will be some situations that are trickier, such as those where there are substantial arrears, have mortgages in negative equity, have very high loan to value mortgages and who have other substantial debts.

Lender organisations have indicated to the FCA that they are willing to consider taking on these loans if they are commercially viable. ‘It may be that we see a two-tier approach, with the larger lenders offering a choice to those with the simplest needs, for example those with repayment mortgage not in arrears, and a range of more specialist lenders able to manually underwrite more complex cases.

The next step will be the publication of a consultation paper setting out the FCA’s proposals to remove regulatory barriers to switching.

The move has been widely welcomed. ‘For over four years we’ve been saying that it’s ludicrous that people are failing affordability tests because they’re absurdly told they cannot afford a cheaper deal than the one they’re already on,’ said Martin Lewis, founder of MoneySavingExpert.com .

‘Affordability checks are important for first time buyers. But for those that are remortgaging to a cheaper deal without moving house, without borrowing more and without change of circumstance, to be told that they cannot afford a cheaper deal is nonsense, and it means the tests are flawed,’ he pointed out.

‘This has left way over 100,000 people paying far too much for their mortgage and they’re at a much higher risk of default and repossession. I am absolutely delighted that after all these years of campaigning, finally we’re hearing that something is likely to be done about it,’ he added.

According to Jackie Bennett, director of mortgages at UK Finance, said that the outline of the action the FCA will take to help those customers stuck on reversion rates who are with inactive or unregulated lenders is a very positive step.

‘The FCA has noted the progress made through the industry’s voluntary agreement to help borrowers with active lenders switch to a better deal. But it has also recognised that regulatory changes are needed to remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders,’ she explained.

‘We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like for like mortgage can switch lenders more easily,’ she added.