Admitting that changes to lending practices after the 2008 financial crisis and subsequent regulation that tightened lending standards were partially to blame, it says that consumers in this position suffer harm as their mortgage payments are “higher than necessary”.
The new proposals are designed to “remove” potential barriers in the FCA’s rules that stop consumers from switching to a more affordable mortgage.
The regulator has laid out specific criteria that borrowers must meet if they are to be eligible: they must have a current mortgage, have been up to date on their payments for at least 12 months, not be looking to borrow more, and be switching to a new deal only on their current property.
The FCA identified 10,000 eligible borrowers with active lenders, 20,000 with inactive lenders, and 120,000 whose mortgages are on the books of “unregulated entities” – firms not authorised to lend. The regulator believes there may be other borrowers unable to switch to more affordable deals despite being up to date with their payments – possibly due to a change in their circumstances since they took out the loan. It also accepts some borrowers could find themselves in a similar situation in the future.
Lenders’ choice
The new rules will enable lenders to choose to carry out “modified” affordability assessments for eligible borrowers. They will also compel inactive lenders and unregulated entities to review their books and contact eligible customers. They will then be expected to write to them, highlighting the rule change and directing them to relevant information.
The basis of the FCA’s new rules is that a borrower who is up to date with payments on their existing mortgage should be able to afford a deal with lower monthly payments. Consequently, provided there is no increase in the amount borrowed, the interest rate stress test – whereby lenders check whether a mortgage remains affordable if the rate rises – does not apply.
The watchdog has also proposed a definition of a “more affordable mortgage” for the purposes of this exercise – taking into account whether product or arrangement fees have been added to the loan or whether the consumer is paying them up front.
A large upfront fee can add significantly to the total cost of the product in the short term, but may not be reflected in the monthly payment. Under the proposed definition, the new mortgage rate must have a lower interest rate in the deal period than that which the consumer is currently paying. Monthly payments, meanwhile, must be no higher than those of the existing mortgage.
The FCA also points out that borrowers could end up paying more overall once fees are added, but it says it does not want to exclude borrowers who cannot afford to pay the fees up front. The regulator has also not ruled out an extension to the mortgage term, which can lead to reduced payments but an increase in the overall cost of the loan. Also, lenders are urged to consider the borrower’s income in retirement in cases where an extension is likely to take a borrower past their anticipated retirement age.
Where the modified assessment has been applied, lenders will be obliged to tell borrowers the basis on which their affordability has been assessed and provide information about any potential risks. Lenders will also be required to report any sales involving the modified assessment to the FCA in their product sales data.
However, lenders will not be obliged to use the new criteria and will be able to choose whether to apply it. The FCA acknowledges that some of these borrowers will have circumstances that are outside many lenders’ risk appetites.
The measure of success
In November 2018, the BBC documentary programme Panorama featured the plight of thousands of former Northern Rock borrowers who had become mortgage prisoners, after their mortgages were sold to private equity firms and other organisations that were not authorised to lend and consequently had no motivation to offer better deals to their new customers. At the time, Ray Boulger, John Charcol’s mortgage expert, said the government’s failure to subject itself to its own regulations had contributed to the predicament of these borrowers.
If these rules come into force, it should mean that many of these borrowers who have been refused other mortgage deals, despite maintaining their mortgage payments, could be eligible for a better deal.
