The Financial Conduct Authority (FCA) recently decided to remove the shackles for ‘mortgage prisoners’ – a category that describes homeowners who are trapped with expensive mortgages. Under the new rules, they will be allowed to switch to potentially cheaper loans.
With this, the FCA also said that tighter lending standards have been in place since the 2008 financial crisis, even despite the interest rates falling to – and remaining at – historic lows ever since then.
All of this led to some ‘mortgage prisoners’ being created – or people who are paying interest considerably above the market rate and being unable to afford new loans. The executive director of strategy and competition at the FCA Christopher Woolard recently said:
“Unaffordable borrowing is a cause of significant harm and mortgage prisoners are often stuck on more expensive mortgages.We have removed barriers to switching and we would like to see firms make changes to their own processes quickly in order that customers can benefit.”
The UK Finance, however, warned the FCA about any managing expectations under the new rules. Jackie Bennett, who is the director of mortgages at UK finance recently said:
“There is a risk that the changes could unduly raise expectations among some customers on reversion rates. This may include customers who are in negative equity, in current or recent arrears or on an interest-only mortgage with no repayment strategy.”
The new rules by the FCA now let eligible consumers to finance their intermediary fees along with their product/arrangement fees through the new mortgage. By removing the barriers that prevent some customers from finding a cheaper deal with immediate effect, the FCA is hoping to help customers who meet certain criteria to move house or borrow more.
In addition, the FCA also confirmed that customers of inactive lenders and firms which are not authorised for mortgage lending will have to be contacted personally – and told that it has become simpler and easier for them to switch to a new lender.
The MP and co-chair of the All-Party Group on Mortgage Prisoners named Seema Malhotra also commented and said:
“The new rules should help stop a few mortgage prisoners being told that the FCA’s rules mean that they cannot afford a cheaper mortgage. Mortgage prisoners must be informed clearly and quickly about their new chance of escape and the names of the lenders applying the new modified affordability test.
But these changes are not enough, the FCA’s own cost benefit analysis suggests that these reforms won’t help 90% of mortgage prisoners. They will continue to remain stuck between UKAR’s policy of selling them on to inactive lenders trapping them paying high variable rates, the Government’s refusal to expand the scope of the regulatory framework and the FCA’s reluctance to use its existing powers to get them a fair deal.”