A Guide: Help for Mortgage Prisoners

A homeowner could have found themselves as one of the UK’s troubled 200,000 mortgage prisoners for many different reasons.

During the 2008 financial crisis, your mortgage may have originally been granted by a Lender that no longer offered new mortgage loans (this is classified as a closed book).

Or maybe your circumstances have changed so that you no longer meet – or you are unaware that you do meet – standard eligibility criteria for remortgaging with an active lender. A good example of this is that your loan is 100% interest only which is not widely offered by mainstream mortgage lenders. Add to this the cost-of-living crisis, and it’s tougher than ever for mortgage prisoners to be able to refinance, particularly if you’re in later life.

Whatever your situation, there are possibly more options available to you than you think, including for our older generations of mortgage prisoners, and it’s driven from the top. For example, there is the new government mortgage charter, and the Financial Conduct Authority’s (FCA’s) Consumer Duty, which puts consumers first and the onus on financial services to provide ‘good outcomes’ for them.

But before we look at all the available help, let’s consider what a mortgage prisoner actually is.

What are mortgage prisoners?

The term ‘mortgage prisoner’ was almost unknown 10 years ago but is now common speak. Very simply, you are classified as a mortgage prisoner if you cannot refinance and find yourself trapped on expensive mortgage interest rates, and therefore cannot switch to a cheaper, more affordable mortgage or to move house.

If you are a mortgage prisoner, you are certainly not alone. And there are many ways to become a mortgage prisoner through no fault of your own. Let’s look at some of them.

Ways to become a mortgage prisoner

We have identified six main routes that can make you become a mortgage prisoner.

1. Changes in affordability – you now can’t afford to pay less
   
   The most common reasons for becoming a mortgage prisoner stem from a change in personal circumstances impacting your finances.
   
   For example, you could find yourself unable to work through illness or redundancy, or some other life event such as the fallout from the coronavirus epidemic, which affects your credit rating, earning potential or ability to pay.
   
   This can prevent you from meeting a new lender’s affordability checks when it comes to switching mortgages. This can have a devastating effect on your monthly mortgage payments if you find yourself unable to switch and are forced to pay the Standard Variable Rate (SVR). As we’ve seen, this can be significantly higher than your initial rate ( Hitting heights of 9% in November 2022') that you’ve been paying for the past two, three or five years, depending on your product type.
   
2. Your property is in negative equity through falling house prices
   
   You can find yourself in negative equity if the value of your property drops below the value of the mortgage you secured against it.
   
   For example, if you secured a £130,000 mortgage against a property of £180,000 and your property value drops to £120,000, you are in negative equity. There are some half million UK properties in negative equity.
   
   Unfortunately, if you are in negative equity and want to remortgage to a fixed rate or cheaper deal, you will likely struggle. Most lenders won’t let people with negative equity switch to a new deal. Instead, you’ll probably find yourself on the lender’s higher SVR. This is what happened to thousands of people during the 2008 financial collapse, when the dive in house prices left many people in negative equity.
   
3. Your mortgage was sold on to a private equity group with no lending licence
   
   After the 2008 collapse of Northern Rock, Bradford & Bingley, and Mortgage Express, which sold borrowers’ sub-prime or high-risk mortgages, the UK government bailed out these lenders and through time, sold them to several entities, including High Street Banks and several private equity firms. In the case of private equity firms, they often did not have the ability to offer new mortgage products and therefore made it very difficult for borrowers without a perfect credit profile to remortgage.
   
   This move has been heavily criticised by many, as it’s left people who are in negative equity or in arrears on their mortgage, with little hope of escaping to a new lender. These companies have been accused of capitalising on these unfortunate mortgage prisoners, by keeping them on inappropriately high interest rates.
   
   In 2019, the Financial Conduct Authority (FCA) announced new rules that made it significantly easier for new Lenders to provide mortgages for customers who were defined as mortgage prisoners. However, you must meet certain criteria, such as being up to date with payments on your existing mortgage, and not looking to move house or borrow more. According to the UK Mortgage Prisoners Support Group, only 10 per cent of mortgage prisoners meet these criteria.
   
4. You are retired or nearing retirement age
   
   Most mortgage lenders have limits on how old a borrower can be when they take out a loan, and how old they can be when it ends, and often this can be close to normal retirement age. For those people who are closer to the maximum age, they will have less time to pay off any new mortgage which raises the monthly payment. This in turn makes it more difficult for older people – especially if they are relying solely on pension income to meet the lender’s affordability criteria.
   
   This is a big worry, especially for the many people in standard interest-only deals with no repayment plan in place. Historically, borrowers with mortgage debt they couldn’t repay would sell up and downsize with what equity they had. However, house price growth has slowed in the last few years and has now started to fall. As a result, many Borrowers now have insufficient equity to be able to afford to buy a new place, repay their loan or remortgage.
   
5. Your ex-partner’s name is on the contract
   
   You’ve decided to part ways. One of you wants to come off your joint mortgage while the other remains living in the property, taking over the mortgage. But when it comes down to transferring the equity, you discover that the one of you wanting to stay in your home doesn’t - now that they’re alone - pass the mortgage lender’s affordability test.
   
   Sometimes this can go on for years, with broker after broker turning you down, despite you never having missed a payment before. You are now a mortgage prisoner.
   
6. Your property is now considered too risky
   
   Everything was peachy for years until the floods started, or the nearby coast started to ebb away in landslides. Or you discovered you’re one of the estimated 1.93 million people, who have been caught up in the cladding crisis and can no longer remortgage or sell.

What help is there for mortgage prisoners?

As well as your physical health, the emotional pressures of financial strain can have a devastating impact on mental health. And in the current economic context, without financial help, more mortgage prisoners could lose their homes.

Let’s look at some potential options to avoid or remediate this. There could well be a satisfactory solution for you that you don’t yet know about.

Maybe you aren’t a mortgage prisoner after all

The main problem for mortgage prisoners – especially if they’re older - is that they don’t meet the lender’s affordability criteria. Maybe though, you can switch to a new lender who is willing to waive some of the strict checks and carry out a modified affordability assessment.

Consumer duty

The FCA’s Consumer Duty has very firmly shifted the onus of a ‘good outcome’ onto the financial service providers. It is their responsibility to help you out in any way they can.

The Government Mortgage Charter

This likely only applies to a few mortgage prisoners, however in 2023 around 85 per cent of UK mortgage lenders signed a government mortgage charter, which states that:

1. A borrower will not be forced to leave their home without their consent – unless in exceptional circumstances – in less than a year from their first missed payment.
   
2. Customers approaching the end of a fixed-rate deal can now lock in a deal up to six months ahead. They can also request a better deal, like for like, with their lender right up until their new term starts – if one is available.
   
3. Customers who are up to date with their payments can:

• switch to interest-only payments for six months
• extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within six months.

These options don’t require a new affordability check and won’t affect your credit score.

FCA support

In 2020, the FCA introduced new regulations which could help some mortgage prisoners with inactive lenders switch to a cheaper deal with an active lender that is part of the same financial group.

The FCA also has information for borrowers worried about rising interest rates.

Mortgage prisoners - remortgage brokers

MoneyHelper has published a list of brokers who have said they will help mortgage prisoners remortgage.

Free debt advice

As well as contacting your lender for support, you can also visit MoneyHelper for useful money tips, budgeting tools and to find help from charities specialising in free debt advice such as StepChange, National Debtline and the Debt Advice Foundation.

LSE London proposed solutions

2020 funding from the charitable foundation of Martin Lewis of MoneySavingExpert (MSE) and the London School of Economics, has enabled LSE London to research the mortgage prisoner situation in an effort to find a solution. Called Releasing the Mortgage Prisoners – final report, it mainly focuses on mortgage holders affected by the 2008 financial crisis.

It recommends that the government draws a line under the mortgage prisoner problem, proposing the following solutions:

1. Free comprehensive financial advice for all mortgage prisoners
2. Interest-free equity loans to clear unsecured element for those trapped in Together loans (a former Northern Rock product)
3. Government equity loans on the model of Help to Buy
4. Government guarantee for new mortgages

We have helped a significant number of Mortgage Prisoner change their lives – why not check us out?

Fed up being a mortgage prisoner? Find out if you could free yourself from your mortgage shackles in five simple steps, using our mortgage calculator.