MortgagesMay 17 2021

Where next for mortgage prisoners?

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Where next for mortgage prisoners?
Pexels/Pixabay

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.

Alternatively, mortgage prisoners may bring a claim for breach of contract. Such claims allege that lenders have continually acted in breach of both express and implied terms of the mortgage agreement, by failing to charge a fair rate of interest. The compensation sought under such claims seek the difference in the amount of interest actually paid, and the amount that would have been paid had a fair rate been charged.

In contrast to mis-selling claims, breach of contract claims are not brought against advisers but against the lender who charged the unfair rate of interest.

In 2019 Harcus Parker was approached by the UK Mortgage Prisoners group; a group established to campaign for fair treatment of mortgage prisoners, with a view to bringing group action proceedings through the courts. 

Since that time some 4,000 mortgage prisoners have instructed the firm. The claims are primarily against: Whistletree (TSB), Heliodor (Topaz), Landmark, and NRAM Limited, each of which acquired portfolios of legacy Northern Rock mortgages following its nationalisation.

If such legal claims succeed, claimants might expect between £20,000 and £30,000 in compensation. Importantly, success in these claims may lead to improved practices around mortgage lending, including rate setting and fair treatment of customers.

What is a fair rate?

The fair treatment of mortgage prisoners underpinned the House of Commons debates about the proposed amendments, and has been a concern for advocates of the government’s handling of the nationalised banks.

It has been suggested by the government that fair treatment of borrowers is ensured by customer protections included in sale agreements when mortgage portfolios were sold.

One such protection was that the SVR charged should be in line with rates charged by active lenders. In practice, documents seen by Harcus Parker show that this protection states that the SVR was to be no more than the third highest SVR charged by the 15 largest mortgage lenders.

It is questionable whether inactive lenders setting their SVR in this way is fair. The claims being brought by Harcus Parker dispute that it is fair and the claims are investigating whether, in any event, this standard has been adhered to.

What else is being done for mortgage prisoners

Since the amendments were voted against, the UK Mortgage Prisoners group has begun lobbying for a moratorium on repossessions, which are on the rise since the expiry of the Covid-19 related payment holidays, until appropriate solutions have been implemented.

In addition, the government and the FCA have stated that a further review of mortgage prisoner data will be undertaken in the effort to find a "practical and proportionate" solution.

The FCA will also review the effectiveness of its new rules, which gave lenders the option to relax affordability rules for mortgage prisoners seeking to remortgage but did not mandate it, and will provide a report by November this year.

The FCA has acknowledged that while small and medium lenders have engaged with the new rules, major mortgage lenders have shown "disappointingly" little interest or engagement.

What can advisers be doing?

FCA data states there are some 250,000 mortgage prisoners. Advisers should be on the lookout for borrowers who show signs of being trapped and who may need specialist advice in order to remortgage.

For the most part, mortgage prisoners will have taken out their mortgage pre-2008 and will be borrowing from an inactive lender, paying a reversionary rate of interest.

In addition to mortgage advice, advisers can assist by making mortgage prisoners aware of debt charities, should they need it, and make them aware of the legal routes available to them.

Olivia Selley is an associate and Tara Panicker is a paralegal at Harcus Parker