The City-watchdog has created an advice route for mortgage prisoners as it shook up its lending rules for borrowers blocked from switching to a cheaper policy.
In a policy statement published today (October 28), the Financial Conduct Authority confirmed it had removed some of the barriers that had stopped so-called mortgage prisoners from finding a cheaper mortgage deal than the one they were on.
This was in line with the new affordability rules proposed in its consultation earlier this year which will allow lenders to carry out a ‘modified affordability assessment’ for mortgage prisoners, providing they are up to date with their mortgage payments, do not want to borrow more money, and are looking to remortgage rather than move home.
Instead of requiring lenders to look at whether consumers can afford a new mortgage policy by using stress testing, income checks and expenditure analysis, under the new rules they will only have to check the new policy has a lower total expected cost and lower interest rate than the current mortgage.
But the FCA went a step further, adding a condition to the rules which allow mortgage prisoners to borrow more money in order to fund advice fees.
This means consumers can ensure they switch to a suitable policy and do not have to stump up the cost for this advice as a lump sum but can split it over their mortgage term.
The consumers these new rules apply to are those that find themselves locked in their mortgage when they could potentially get a cheaper deal elsewhere, often dubbed mortgage prisoners.
This concerns predominantly consumers who took out a mortgage before the financial crisis but are now blocked from switching due to stricter lending rules, or because their loan was sold to an inactive lender.
Such consumers were previously often told by lenders they could not afford the new deal under the lending rules despite the new policy having cheaper monthly payments than their existing one and the borrower having continually paid off their monthly bill and stayed out of arrears.
Today the FCA also enforced rules which mean inactive lenders and unregulated entities must review their customer books and contact consumers that might fall into the mortgage prisoner category..
These include customers of old Northern Rock and Bradford & Bingley loans, which were bought by the government as part of a rescue package after the financial crash but later sold on to unregulated firms.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm.
“Mortgage prisoners are often stuck on more expensive mortgages. We are removing barriers to switching in our rules and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible.”
How to handle mortgages held by unregulated entities became a sticking point for the FCA in recent years and in June the regulator’s chief executive Andrew Bailey to the Treasury select committee the watchdog was "taking seriously" the option of extending its regulatory perimeter to help such mortgage prisoners.
Although an industry-wide voluntary agreement was established in July last year to allow the 10,000 mortgage prisoners of active lenders to switch to a better deal, about 120,000 mortgage prisoners were still trapped on a higher interest rate with unauthorised firms and 20,000 mortgage prisoners are estimated to be stuck with inactive lenders.
The new rules will allow active lenders to use modified assessments for those trapped with unauthorised and inactive companies, potentially allowing them to switch, and force said firms to contact their consumers to inform them of the change.
The new rules will come into effect from today.
imogen.tew@ft.com
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