Mortgage prisoners are homeowners who are trapped borrowing from inactive lenders and paying high rates of interest.
For the most part, these mortgage prisoners were created following the financial crisis and the nationalisation of Northern Rock and Bradford & Bingley, who subsequently became inactive lenders.
In most cases these mortgages have since been sold by the government to other inactive lenders. Inactive lenders do not offer new mortgage products, meaning that following the expiry of the initial fixed rates, borrowers have been trapped paying high reversionary rates, commonly known as standard variable rates.
These borrowers generally do not qualify for new deals with active lenders, as they fail to meet stricter affordability rules implemented by the Financial Conduct Authority in 2014.
Proposed amendments to the financial services bill, which we debated in the House of Commons last month, sought to alleviate the financial pressures on mortgage prisoners.
The SVR cap amendment
The proposed amendments included a cap of two percentage points above the Bank of England base rate on the SVR chargeable by inactive lenders.
In addition, mortgage prisoners would also have been able to access fixed-rate deals under specified circumstances. The amendments would have reduced the interest payable by the majority of mortgage prisoners who in some cases are paying as much as 5 per cent. The amendments were not passed.
The rejection of the amendments stemmed from concern that the SVR cap would be unfair to lenders, and would be a disproportionate intervention in the market for a small number of borrowers.
Those opposed to the amendments were also concerned about the unintended consequences of intervening in the securitisation market, an important tool used by lenders to raise funds, as well as the precedent that it could set regarding the involvement of the government with the economic markets.
While, if passed, the amendments may have granted some immediate relief to mortgage prisoners, the amendments would not have provided compensation for the decade of losses already incurred by them.
Where next for mortgage prisoners?
In the absence of legislative intervention or a formal redress procedure, mortgage prisoners are seeking compensation through the courts. The legal actions being pursued by mortgage prisoners are broadly divided into two kinds: mortgage mis-selling claims and breach of contract claims.
Mis-selling claims seek compensation for alleged failings in the manner in which the mortgage products were recommended and sold. The basis of such a claim might be that the recommended product did not meet the buyer’s needs, or the risks were not properly explained. Such claims are typically brought against the mortgage brokers or financial adviser who recommended the product.
These claims must be brought within six years of the advice complained of, meaning that the scope for many mortgage prisoners to bring such claims is increasingly limited, with most affected mortgages having originated more than six years ago.