The government has been asked to fund holistic financial advice for some 195,000 “mortgage prisoners” who have been stuck on higher than average interest rates since the financial crisis.
A report published yesterday evening (March 1) by London School of Economics and Political Science, commissioned by Money Saving Expert, makes a series of recommendations to help 195,000 closed-book borrowers unable to transfer onto mainstream mortgage market products.
This is the third report produced by LSE on the subject, but it is the first to lay bare the potential cost of helping these consumers.
If the majority (70 per cent) of closed-book borrowers were to act on the recommendations - which include free financial advice, interest-free equity loans, and help-to-buy-style loans - the cost to the government could reach £2.6bn.
While the Financial Conduct Authority has previously classed just 47,000 mortgage borrowers as ‘prisoners’, the LSE report argues all 195,000 closed-book borrowers should be classed within this bracket.
This larger number includes those in payment shortfall, borrowers unlikely to benefit from switching, and those nearing the end of their mortgage term who may still benefit from switching.
LSE’s report recommended all 195,000 closed-book borrowers should be contacted individually “to access comprehensive and holistic financial advice”.
It added: “This would include not only advice about mortgages, but also about other types of debt, benefits and income sources.
“Such advice would take into account the potential for refinancing of unsecured debt where this represents a major obstacle.”
LSE said the advice could be paid for by the government, initially through bodies like Citizens Advice and StepChange.
Particularly complex cases, it said, could be referred to specialist financial advisers.
“Take-up of this advice would be required for any borrower who might go on to access other elements of the [support] package,” the report explained.
These elements include an interest-free equity loan to clear the unsecured element of Together loans, which currently pose an obstacle to remortgaging.
These loans were offered by Northern Rock, and meant that sometimes customers had borrowed up to 125 per cent of their property's value - hence part of the loan being unsecured.
LSE recommends a cap of £20,000, which it said should cover almost all Together unsecured loans as the average Together unsecured balance is approximately £9,400.
The report also suggests loans based on Help to Buy could address those with more substantial arrears and other unsecured debt - such as credit cards bills.
By reducing mortgage prisoners’ loan-to-values and overall debt interest payments, LSE said it would be easier for borrowers to repay some debt and remortgage to a market product.
Steps taken by the Treasury so far
Chief secretary to the Treasury, John Glen, has committed to reviewing LSE’s proposals, saying they would be given “full consideration” as long as they deliver value for money, are a fair use of taxpayer spending and address risks of moral hazard - all things the report takes into account.
A Treasury spokesperson told FTAdviser: “We have already taken steps with the FCA to update mortgage lending rules, removing the barrier that prevented some mortgage prisoners from being able to switch.
“We are open to further practical and proportionate solutions to help mortgage prisoners, working with the FCA and industry to carefully consider all proposals put forward.”
In 2019, the Financial Conduct Authority estimated there were 250,000 borrowers who have a mortgage held by an ‘inactive firm’ - that is, a firm which is no longer lending or regulated to lend following stricter regulations brought in after the financial crisis.
Since then, it has refined its definition of a mortgage prisoner to the 47,000 borrowers, part of the 195,000 mortgages in closed books as of 2021.
The FCA loosened its rules in 2020 to allow lenders to assess affordability based on a mortgage prisoner’s track record of making mortgage payments if they are not looking to move house or borrow more.
It also established a list of mortgage intermediaries willing to help mortgage prisoners, which was hosted on the Money and Pensions Service’s site.
However, a 140-page mortgage prisoners review from the City watchdog, published by the government a year ago found a lack of lender risk appetite and lack of engagement from borrowers meant fewer borrowers have switched mortgages than expected.
It showed the number of mortgage prisoners engaging with brokers on the regulator's dedicated list had declined steadily over the 2021, resulting in a mere 26 mortgage offers being made to borrowers over the course of 10 months.
Following the publication of this report, the Treasury promised to commit to ‘practical’ solutions for mortgage prisoners.
It said it would seek “further engagement with inactive firms” as part of its post-review follow up “to help as many affected borrowers as possible switch to an active lender”.
One practical solution the Treasury cited for mortgage prisoners was taking advantage of the modified affordability assessment, which the FCA announced back in 2018.
It allows lenders to carry out partial, rather than full, affordability assessments on borrowers which fit the mortgage prisoner profile.
ruby.hinchliffe@ft.com
