The government should “free” mortgage prisoners and cannot rely on the regulator to sort the issue, according to a report from the London School of Economics and Political Science (LSE).
The report on mortgage prisoners argued that the regulator had likely “reached the end” of what it can do, and that the government had a ‘moral responsibility’ to “free” mortgage prisoners.
It said current policies helped only a “small minority” as they depended on the risk appetite of lenders.
Kath Scanlon, distinguished policy fellow at LSE London, said: “Our research aimed to understand the range of circumstances facing mortgage prisoners and identify solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their home, and we found a strong case for fully investigating a wider variety of solutions.”
Mortgage prisoners are customers who have previously been unable to switch mortgages despite being up-to-date with their payments.
The FCA loosened its rules last year to allow lenders to assess affordability based on a mortgage prisoner’s track record of making mortgage payments and last week Nikhil Rathi, chief executive at the FCA, said approximately seven lenders had started to offer products to enable mortgage prisoners to switch to a better deal.
The regulator also implemented a rule change last month for intra-group switching that should help some closed book customers, who are within the risk appetite of the relevant lender, switch to a new mortgage that may be more affordable.
The FCA hopes some firms may choose to make use of the rule change where it is within their risk appetite to do so, although it has always noted that lending was a “commercial decision”.
Among the solutions proposed in the LSE report is a government equity loan to reduce loan-to-value ratios of some mortgage prisoners and enable remortgaging in the open market through the FCA’s modified affordability assessment.
According to the report, the equity loan could be interest-free for an initial period, similar to the government’s Help to Buy scheme.
Another potential measure put forward was a ‘mortgage rescue’, enabling those whose mortgages are “financially unsustainable”, even if payments are reduced, to remain in their homes as tenants while the property is sold to housing associations with a buy-back option later, such as via a shared ownership structure.
Other measures included funding and signposting debt counselling and advice.
The report argued the government should fund independent debt-counselling organisations to provide more comprehensive help, rather than just mortgage advice, and signpost their services to mortgage prisoners.
The FCA in July issued a callout to mortgage intermediaries willing to help mortgage prisoners who have previously been unable to switch mortgages, despite being up-to-date with their payments.
The initiative led 455 mortgage advice firms to come forward to offer their services, all now listed on the Money Advice Service website.