Rate rise risks pushing mortgage prisoners to foodbanks

Mortgage prisoners trapped in products sold before the 2007-08 financial crisis have been forced to rely on foodbanks as interest rates hit 8 per cent and above.

Advisers working pro-bono have told FTAdviser of pensioners receiving their first foodbank parcel as they "haven't been able to figure out any alternative options' as their mortgage repayments keep going up.

Another mortgage prisoner couple - known to FTAdviser as Mr & Mrs L - said they are now on 8.13 per cent (£1,534.03 in total) a month.

They are expecting their provider - first GMAC in 2006, then MAS5 in 2007 and The Co-Operative Bank since 2009 - to apply the next rate increase if the Bank of England raises the bank base rate in May.

It is sad to see some of the situations these people find themselves in.Sebastian Reimann, Virtus

A spokesperson for The Co-operative Bank, said: "When the BoE makes announcements to change Base Rate, the bank considers how it responds to that change and a number of factors inform its decision.

"The bank continues to review the pricing of its full mortgage range across all brands, including securitised/closed book mortgages and will communicate with customers should there be a change to mortgage pricing as a result of a movement to Base Rate."

Mrs L told FTAdviser she has also gone to a foodbank to help herself and her husband - who has been in serious ill-health for many years - as "there is nothing left to trim from our budget".

Lack of forbearance?

The Ls, who have no option but to move into social housing from the family home which has become a "nightmare" for them, said: "It's difficult to say what our next course of action will be.

"There appears to be no form of forbearance with MAS5 without it impacting our credit rating and we need to remain clear for social housing options and private rentals."

This is despite having made it known to MAS5/The Co-operative Bank in 2016 that her husband was a vulnerable client and unable to work. 

We conduct a detailed financial assessment with the customer who is in financial difficulty then list what options may be available so they can choose how to proceed.The Co-operative Bank

According to The Co-operative Bank, it has a "number of forbearance measures in place and various options to help vulnerable customers, and customers who are unable to make their monthly mortgage payment".

The spokesperson added: "The type of support we offer is determined by the customers’ circumstances and whether, with our help, the customer can manage their mortgage on a sustained affordable basis.

"Specialist agents within our mortgage support team, who are trained to help customers with sensitive personal circumstances, provide support that is bespoke and tailored to a customer’s individual situation."

It is understood that all lenders are required to provide factual and accurate details of all their clients' payment histories and credit reference agencies.

Where it went wrong

At first there was no problem paying back the mortgage for the Ls, but then in 2008, the couple's fixed rate was coming to an end and Mrs L said she asked MAS5  what the options were for, and "we were told there were no other options but the BoE base rate + 1". 

This was because they were on a mortgage originally provided by a now-inactive lender, although it is understood that, at the time, the couple could have remortgaged with a different lender.

This got worse in 2009 when MAS5  was taken on by the Co-operative Bank - meaning both their original and their second lenders were inactive. MAS5 therefore had no new products to offer the Ls.

As the UK entered austerity measures, the Ls found their mortgage costs spiralling out of control while their business came to a standstill. 

She said Shelter had written to the Co-operative Bank on her behalf in 2016, five years after her husband's mental breakdown, which led to suicidal idealisation and severe agoraphobia. "The stress of the mortgage arrears was unbearable", she said. 

My husband was mentally too ill to cope with an eviction process.Mrs L

She said the Co-operative Bank had given them a payment holiday in 2016 for a few months, but after that they ended up owing £12,000.

By this time she was caring for her husband full time and unable to work.

Mrs L added: "During this time, they were pushing for an assisted voluntary sale despite the fact my husband was mentally too ill to cope with an eviction process."

When asked whether it is common practice to push for an assisted voluntary sale, a spokesperson for The Co-operative Bank said: "We conduct a detailed financial assessment with the customer who is in financial difficulty then list what options may be available so they can choose how to proceed.

"MAS5 has given the utmost support to the Ls given their circumstances and this was an option presented to the Ls, among others; this was not for MAS5 to pursue."

The spokesperson continued: "Where customers reach the conclusion that due to their overall long-term financial difficulties the mortgage is not sustainable, and putting the property on the market for sale and exiting the mortgage is financially the best option for them, we can offer help with this through our assisted voluntary sale scheme.

"This scheme allows our customers to remain in their home and the property offered for sale on the open market and allows a managed exit for our customers achieving the best possible price."

Fos involvement

As of March 28, 2023, the couple finally paid off the arrears and now want to get out of the house which has been their "prison" for the past decade. 

She added: "I started the social housing application process this week, but we still have no time frame for [my husband's] treatment, so we're just hanging on as long as we can.

"This kind of level of pressure is unsustainable for anything more than a month or two. Unless rates actually start to fall very soon, we [will have to] put the house up for sale, probably via auction."

She added that her Certificate of Visual Impairment arrived this week and social services have already been in touch to undertake an assessment, "but it seems kind of pointless right now as I don't know where we'll be living". 

We always look at each complaint on its own merits and we expect lenders to treat their customers fairly. We can step in when they don’t.Fos

A spokesperson for the Co-Operative Bank said: "In light of the FCA voluntary scheme and as a subsidiary of The Co-operative Bank, since November 2019, customers with a MAS5 mortgage can apply to The Co-operative Bank for a new mortgage if eligibility criteria is met."

To be eligible customers have to meet criteria set by the FCA; the regulator has also outlined best practice.

Since November 2019, following the launch of the FCA voluntary scheme, as a subsidiary of The Co-operative Bank, customers with a MAS5 mortgage can apply to the Co-operative Bank for a new mortgage if eligibility criteria is met.

As a regulated lender, the Co-operative Bank is required to apply its underwriting criteria and lending policies to ensure any products it offers are suitable for its customers’ circumstances.

A spokesperson said: "To understand whether a customer would be eligible to switch to a new mortgage product, we carry out an advised mortgage to fully review and understand their circumstances, which would then allow us, if appropriate, to recommend the right mortgage product for them."

The spokesperson said that, following clearance of the Ls recent arrears, an appointment has been booked with the Co-operative Bank on May 9 to "discuss next steps". 

The couple have a complaint with the Financial Ombudsman Service; an investigator said it could only look at the fairness of interest charged over the past six years, taking into account the earlier interest rate history impacting that period.

But a solicitor working pro-bono with the couple says that earlier parts of the complaint should be looked into, so the couple have appealed to an ombudsman. 

The couple told FTAdviser that they are waiting for the ombudsman to decide how far back its investigation can go, the details of which we cannot disclose while it is ongoing.

Fos said it did not comment on ongoing cases.

The history

Mortgage prisoners have been experiencing the pressure of meeting unfair high interest rates for 14 years, when many mortgage lenders failed or were consolidated as a result of the 2007-2008 financial crisis.

While interest rates were dropped by the BoE to 0 per cent in 2009, people whose lenders failed found their loans being sold as part of 'closed book' deals to other banks.

But while most mortgage rates fell over time, allowing people to remortgage onto a lower rate, those who were trapped in variable rate products belonging to 'closed books' found themselves facing ever-increasing rate rises.

They were locked into their mortgage contract - seemingly with no end in sight, with many unable to move house to downsize, and rates rising alongside inflation over the past few years. 

The table shows just how much the L's mortgage repayments were rising when the rest of the UK was enjoying rock-bottom mortgage rates. 

Their story has been replicated across thousands of British households, with the Financial Ombudsman Service acknowledging a series of mortgage prisoner cases coming into its remit.

A spokesperson for the Fos told FTAdviser: "We always look at each complaint on its own merits and we expect lenders to treat their customers fairly - and we can step in when they don’t.

"We recognise the cost of living crisis impacts many people, including mortgage borrowers, and we are working through complaints as we receive them."

It is understood the Fos has approximately 100 open complaints against MAS5.

Regulatory work

Even HM Treasury warned as early as 2009 that the sale of closed books from inactive lenders could raise rates that would be potentially unaffordable. It warned that there could be "severe harm to borrowers" as a result of actions taken by 'current lenders'. 

But even with the Financial Conduct Authority working with lenders to treat customers fairly and to pay special attention to those in vulnerable situations, consumer champion Martin Lewis has found that not enough had been done. 

On page six of a 37-page report by the London School of Economics, which was commissioned by MoneySavingExpert and paid for by founder Martin Lewis, it said: "The focus of the FCA has primarily been on products rather than on the interaction between products and customers.

"This has made their recommendations partial and potentially unworkable for lenders.

"The FCA has taken some limited steps to deal with the problem in conjunction with mortgage lenders, but acknowledged that these would benefit at most only a tiny proportion of the existing prisoner population."

A letter sent in May 2021 from the Treasury to the L's local MP, Kit Malthouse, seen by FTAdviser, highlighted that the biggest problems were affecting a small minority - and it was "not possible" to do much to help this cohort.

The Treasury's letter stated: "I am sorry to hear of the difficulties your constituent is facing and want to reiterate that this is an issue I take very seriously.

"I understand that customers who are unable to access cheaper mortgage deals are in a stressful situation and remain committed to supporting these borrowers.

"The UK Mortgage Prisoner Group base their data on a survey of 449 participants; however, FCA data was conducted using information on 250,000 borrowers with inactive lenders alongside a credit referencing agency data set which includes data on 23,000 borrowers with inactive lenders."

This data showed:

• Of the 250,000 borrowers with inactive lenders, 125,000 could switch with no intervention. These borrowers are therefore not mortgage prisoners, the FCA data said.
• Of the remaining 125,000 who struggle to switch, the FCA data estimates that 70,000 are in arrears and so would struggle to access a new deal even if they were in the active market. The letter said: "The Government does not underestimate how stressful it can be to be in arrears, but it is important to note that borrowers in arrears with inactive firms are in a similar situation to borrowers in arrears with active lenders. In both cases, it is not possible to move to a new fixed rate deal or to switch lender."
• This leaves c.55,000 borrowers who may struggle to switch but are up to date with their payments. The letter added: "This is the cohort of borrowers that [the Treasury] has worked closely with the FCA to support, by implementing rule changes to the affordability assessment which removes the regulatory barrier that prevented some customers from accessing new products."

But advisers working with mortgage prisoners have said even though the cohort might be small by regulatory standards, the fact 70,000 were in arrears in 2021 - and then having this compounded by the cost of living crisis in 2022 - leads to "immense suffering".

Sebastian Riemann, director at Virtus Private Finance Limited, has been working with a number of mortgage prisoners over the past few years to try and help on a pro bono basis.

He said: "Often the effects of clients being in this situation has had a detrimental impact to other parts of their life (health/work) which has meant that mostly we were unable to resolve the issues in hand.

"One thing that sticks out is that many of these individuals are in fact on relatively good loan-to-values and, as the Bank of England base rate started reducing significantly back in 2009, many of these prisoners experienced their rates increasing.

"It is sad to see some of the situations these people find themselves in as it does appear that more could have been done from those in charge."

Have your say

Have you come across any mortgage prisoners? What have you been doing to help in cases such as these? What more ought to be done?

Let FTAdviser know by emailing simoney.kyriakou@ft.com