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.
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.”