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What is a mortgage prisoner?

Mortgage prisoner is a term heard more often these days, what does it mean? Simply put it refers to those borrowers who cannot due to either current lender restrictions or affordability requirements switch to a different product or lender for a better deal.

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There are many reasons for a borrower to be considered a mortgage prisoner. In the main, there are two common reasons for this and I will look at each of these. There are other scenarios that can lead to being a mortgage prisoner but for illustration purposes the two I will focus on are the most common.

No longer meeting affordability requirements

Affordability is a common reason to be classed as a mortgage prisoner, some may say this is something that is more a borrower than a lender issue. After all, If something has changed in a borrower's life then lenders can't be expected to ignore that. For example, those reasons may include:

  • Reduced income
  • Loss of a job
  • Higher outgoings

In those circumstances, it would be fair to say that the borrower's position is not something a lender can ignore. But the reasons above don't make a borrower a mortgage prisoner. None of the reasons above specifically mean the borrower can't afford their mortgage payments. It can still put a borrower in that position. Refer to the next reason, having a mortgage with an inactive lender.

Moving lender is still an issue

For many borrowers that have had mortgages for a long time, certainly prior to the changes in affordability rules in 2014 they can still have issues that could be classed as mortgage prisoners.

They met affordability at one point in the past in order to get a mortgage. Despite never having missed a payment they are still in the position where they would not meet today's more stringent rules around affordability. So if they approached another lender they may say no.

Those borrowers may therefore be prevented from getting the best deals in the market, or they may simply have had poor experiences with their current lender that makes them want to move. So if they are unable to move due to affordability rules they can no longer meet that could be classed as being mortgage prisoners.

Many borrowers even find themselves being blocked from a new lender due to affordability even though the payments are less than they have been paying.

Having a mortgage with an inactive lender

An inactive lender is one that has mortgage borrowers and is simply managing a set of customers. Following the 2008 financial crisis, there were some lenders that collapsed.

Two that stand out are Northern Rock and Bradford & Bingley, after their collapse there were around 200,000 of their mortgage customers transferred to inactive lenders.

What is an inactive lender?

An inactive lender is in effect a servicing company that simply makes sure the mortgage customers pay each month, issues statements, collect arrears and wait for those mortgages to either move to another lender or come to an end.

These lenders do not issue new loans, offer further advances or new deals for customers to switch.

And there lies the issue. If a customer can't borrow more money for whatever reason or they come to the end of beneficial rate but can't get a new one, what do they do? Well, the only option is to move to another lender.

Affordability

Refer back to the first reason on affordability. Given today's more stringent rules around affordability, a borrower may not be able to go to another lender. For many, they are stuck on a high rate of interest, for the most part, a standard variable rate that can be three times that being offered by other lenders in the market.

A borrower with an inactive lender paying 5% interest on a mortgage where they could get as low as 1.5% at another lender can't. Many borrowers took out their mortgage prior to affordability rule changes in 2014 and don't meet affordability anymore under these rules so another lender won't take them. Despite never having missed a payment ever.

Those who fit into the image above are mortgage prisoners. For most if not all this wouldn't be an issue if their inactive lender would offer new deals in line with the market offering, but they don't.

Summary

If you are a mortgage prisoner you likely know it, of course, some don't as they are happy with their current lender and not aware affordability would be a blocker if they did try and move. Those with an inactive lender will know they are a mortgage prisoner.

If you are affected by this or think you may be there is a support group called UK Mortgage Prisoners, you can find them here.

Lee Wisener CeMAP, CeRER, CeFAP, CSME

Having worked in the mortgage industry for over 20 years I have always wanted to build a website dedicated to the subject. Also being a geek when it comes to the internet all I needed was time and I could both build the site from scratch and fill it with content. This is it!