A report by the Financial Conduct Authority this week has revealed that there are an estimated 47,000 so-called ‘mortgage prisoners’ in the UK.
A mortgage prisoner is a borrower who is trapped on a high interest rate without being able to move to a new lender, effectively committed to paying eye-wateringly high amounts of interest compared to rates currently available.
Further detail in the FCA Mortgage Prisoner Review showed that the vast majority of these are on lender Standard Variable Rates, meaning the forthcoming rate increase, widely expected ahead of the Monetary Policy Committee monthly meeting on 16th December, would have a potentially disastrous impact.
“Standard variable rates range from around 3.5% upwards, some even above 6%” says Andy McBride, director of Professional Contractor Mortgages. “This means that even a relatively modest rate increase of 0.25% will cost an additional £250 per year per £100,000 of borrowing. When many mortgage prisoners’ finances are already creaking under the weight of rising inflation and energy bills, the result could be huge numbers of missed payments.”
Rules have been introduced over the years by the FCA in order to help alleviate the financial strain of those trapped on high interest rates, however the majority of these measures are still voluntary for the lender, meaning they can still refuse to refinance a loan even if it has been maintained flawlessly.
“Many of these borrowers have mortgages pre-dating the 2008 financial crash, with lenders who no longer exist” continues McBride. “Mortgage prisoners are usually those hit hardest with any rate increases as these loans are often services by essentially debt management companies, rather than mainstream lenders.”
“Ironically many people can demonstrate a record of making payments on time every month for a number of years, however lenders do not consider this when making lending decisions, basing outcomes purely on income.”
While the outlook appears bleak, there is however, light at the end of the tunnel for the nations Contractors. The use of a specialist broker can hugely increase borrowing potential, meaning an end to high interest rates and being able to take advantage of the historically low rates presently available.
“The mortgage market has changed hugely since 2008, and many people have also changed the way in which they work” concludes McBride. “We are seeing more and more enquiries from contractors who have the impression that they are a mortgage prisoner because a lender has declined to lend.”
“Often, however, lenders can have assessed contractors incorrectly, trying to assess a Limited Company contractor as self-employed, for example, leading to declined applications where a specialist may have a different outcome.”