The All Party Parliamentary Group on Mortgage Prisoners has called for the introduction of a cap on standard variable rates (SVRs) to prevent mortgage prisoners from being "exploited".
In a letter to the Competition and Markets Authority and the Financial Conduct Authority, the APPG requested an “urgent investigation” into the level of SVRs and for a joint consultation on the introduction of a cap.
The APPG warned mortgage prisoners were being “exploited” by high SVRs, with rates of up to 5.35 per cent being reported, compared with SVRs of up to 3.59 per cent from six of the largest banks and building societies.
According to the group, despite reforms to mortgage affordability testing in October 2019, “not a single mortgage prisoner” had been able to switch to a different lender using the new test.
Under the rules lenders can 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, they only have to check the new policy has a lower total expected cost and lower interest rate than the current mortgage.
But the MPs said as a result of the coronavirus the APPG could not place “much hope” that the reforms will lead to a reduction in the “so-called ‘loyalty penalty’ being paid by mortgage prisoners”.
Seema Malhotra, co-chair of the APPG on mortgage prisoners, said: “Too many mortgage prisoners have been exploited by being held on high standard variable rates or have seen their rate increased with no justification.
"The CMA and the FCA should intervene quickly to cap the interest rates being charged. The coronavirus has led to unprecedented strain on family finances and we need to help mortgage prisoners, including many key workers, get a better deal.”
Last month the Financial Conduct Authority offered lenders a three-month extension in which to contact mortgage prisoners about switching to a better deal, as a result of the impact of the coronavirus pandemic on the market.
Kevin Hollinrake, co-chair of the APPG on fair business banking, added: “It is simply unfair that hundreds of thousands of UK individuals, couples and families are locked out of a mortgage market that the rest of us take for granted.
"Even if lenders were following the new guidance on the affordability test, the FCA admits that this will only help a small fraction of mortgage prisoners. A cap on the SVR is the simplest and quickest way of addressing this injustice.”
Additionally, the APPG has asked the competition and financial watchdogs to provide views on “whether it is a breach of any regulatory requirement, rules, principles or general consumer protection law… for a lender to refuse to tell customers why it has increased their variable interest rate”.