What are mortgage prisoners and how can you free yourself if you've become one? We mythbust this conundrum.
Mortgage prisoners is one of those terms you don’t really come across unless you find yourself in some form of negative equity, or a situation where you’re unable to remortgage. Most likely because when we do take out a mortgage, the term negative equity isn’t something we bring up in casual conversation. In that situation especially, it’s a form of taboo. And yet, what happens if you become a mortgage prisoner is something you should be well aware of.
You see, in the UK, mortgage prisoners aren’t actually all that rare. It’s estimated that there’s over 250,000 of them in the UK, many of whom include former Norther Rock and Bradford & Bingley customers who are, as Martin Lewis describes, “forgotten victims of the 2008 financial crash”. And he’s quite right to call them victims.
A report recently commissioned by MoneySavingExpert also found that out of all types of borrowers, mortgage prisoners are the most likely to have physical and mental health problems. They’re also 40% more likely to default on payment because of the financial upset caused by the coronavirus pandemic. So the question now is, if the market does decide to take another turn for the worse, how do you avoid becoming a mortgage prisoner in the UK, or if you already are one, how do you escape?
After something specific about mortgage prisoners? Use the menu below to reach the information you need fast.
- What is a mortgage prisoner?
- How could you become a mortgage prisoner?
- How to avoid becoming mortgage prisoners in the UK
- The FCA and mortgage prisoners: Updated Rules for 2021 & Beyond
- How can I get out of a high interest mortgage? (AKA the escape plan)
Mortgage prisoners are homeowners who are unable to switch from their current mortgage provider, due to the fact they don’t meet the more stringent borrowing criteria that was enforced by lenders in 2014 (more on this later)!
Usually when faced with then end of their mortgage term, a borrower would do some form of remortgage to avoid being placed on the steeper Standard Variable Rate. A caveat that’s normally written into the small print of most mortgage contracts.
However because of these more stringent regulations, a good portion of buyers were unable to do so, despite never missing a payment and the new remortgage working out as more affordable. As a result, the majority of UK mortgage prisoners find themselves shackled to interest high rates and unable to do much about it. Not exactly the fairest situation, especially when you’ve got a large loan and have been trapped into paying high interest rates for a number of years.
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While the term ‘mortgage prisoners’ implies that all those imprisoned are in fact the same, don’t be fooled. There’s more than just one way you can become a mortgage prisoner in the UK. Here’s just a few possibilities for you to consider…
Becoming Mortgage Prisoners Because Your House Drops In Equity
Today, you eligibility for a mortgage is largely determined by the amount of equity in your home. In the case that house prices take a turn for the worse, your equity will follow suit. Depending on how low prices fall, you could be left with very little or even plunge into negative equity. This is where your equity falls below zero (gulp)!
You see, equity isn’t an amount, it’s a percentage. So for instance, say you have a house that’s currently worth £500,000 and 10% of that is your equity (£50,000). If the value of that property drops to £400,000, your stake in the loan is now only worth £40,000. This is why since 2008, lenders have introduced minimum Loan To Value (LTV) requirements to prevent people becoming mortgage prisoners. For most, a 10% deposit is now likely the smallest deposit that can be put down.
Think of equity as your safety net. The more you have, the less likely you are to become a mortgage prisoner. Plus you tend to get a cheaper rate for doing so too. It’s a win-win!
Losing Your Job & Becoming A Mortgage Prisoner
Your household income is another crucial factor when applying for a mortgage, with the ability to turn you into a mortgage prisoner. In the case you lose your job or your business folds, then in the eyes of a lender, you could no longer be eligible for a mortgage of the size you currently have.
So for instance if you’ve an outstanding balance of £300,000, but lose your high paying job in the city. Because of that you may only be eligible for a remortgage of £250,000, leaving you trapped as mortgage prisoners with your current lender until you pay down your equity or your earnings go back up.
Yes, as crazy as it sounds, at the time when you have less money coming in and need to save, you’re trapped within your current deal, usually paying a more expensive rate than if you were to switch.
FYI: It’s not just losing your job though that could make you a mortgage prisoner. Go from full time work to being self-employed and a similar situation could occur. Why? Because typically lenders consider income from someone self-employed to be less stable.
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Imprisoned To A Low Credit Rating
Apply for a mortgage of any sort and one of the first things a lender will look at is your credit rating. Default on a bank loan or a credit card that affects this rating, and it’s likely you’ll find it hard to remortgage. However, it’s worth remembering that a low credit score will also affect your ability to borrow money outside of mortgage too, so be cautious!
TIP: If you apply to remortgage, stop there. Don’t keep applying and keep getting declined. Each decline will be another black mark on your credit file and only drag your score lower.
Left Powerless Because Your Lender Is ‘No Longer Active’ (i.e. Goes Bust)
Another situation that could lead to you becoming mortgage prisoners, is if your lender becomes what’s known as ‘no longer active'. An inactive lender is a mortgage company that is fully authorised to lend, however is no longer offering new deals or taking on new customers. The collapse of Northern Rock and Bradford & Bingley in 2008 is a prime example of how a company can go from an active lender to an inactive lender.
In response, the majority of the mortgages owned by these banks were sold on to private investors. A move that made remortgaging particularly challenging, as unlike a large active lender, these new investors didn’t have others products they could transfer borrowers onto to lessen the impact. Therefore, Bradford & Bingley and Northern Rock mortgage prisoners were tied not only to the investor, but their original mortgage product too. As a result, many have been forced into footing large interest bills - an unnecessary cost they should never have had to incur.
FYI: Any mortgages that were previously owned by Northern Rock originally became product of the UK Asset Resolution (UKAR), a state owned company. However in 2015, the government agreed a sale of these mortgages to private equity firm, Cerberus Capital Management. Whereas any mortgages from Bradford & Bingley and Mortgage Express are still held by UKAR. Any loans issued by Mortgage Agency Services 1-7 LTD are now managed by the Co-operative Bank.
Mortgage Prisoners Due To Age
Although some would argue that it’s unfair, you can also become mortgage prisoners because of your age. Most lenders have a cap or age limit. This could be either the age of the borrower when they take out the loan or their age at when it’s due to complete. Usually if you’ll be over aged 75 or over by the time you’ve repaid the loan, then you will find it increasingly hard to secure lending. And this doesn’t just apply in first instance.
Manage to take out a 30-year mortgage at 45 or above, and remortgaging down the line may prove to be difficult too. Usually each company has their own policy on this, so opting for a more lenient company could make life harder down the line. Which is why if you’re close to this threshold, we’d urge you to tread carefully. The last thing you want is to become mortgage prisoners at the time in your life when you can finally relax!
But that’s not to say if you’re over 45, taking out a mortgage is risky. It all depends on your term. Take out a 10-year mortgage at 50 and it’s unlikely that you’ll ever become a mortgage prisoners unless you default.
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Affected By The Mortgage Market Review 2014
Getting a mortgage pre 2008 was a lot easier than it is nowadays. Buyers were able to get 100% mortgages for their homes, often with no deposits. There was even something called a 125 mortgage, which yes, was a 100% mortgage plus an extra 25% in the form of an unsecured loan. Mind boggling stuff!
However, in response to the financial crisis that all changed. Lenders tightened up on how much they’d lend, requested a sizable deposit and also adjusted their lending criteria quite considerably. A big driver of this was the Mortgage Market Review in 2014.
Prior to the review, mortgage affordability was based on income, whereas now it’s based on an applicant’s overall mortgage health. By that we mean how much you can afford after you’ve factored in any expenses and debts.
To assess you as a borrower, mortgage companies use a system called stress testing. This is where they apply different scenarios to your situation to see test how well you’d be able to cope. So for instance how you’d be able to cope in the case of a financial crash or a rise in interest rates. A strategy that offers great reassurance for both the bank and any new borrower. However one thing it didn’t take into account was the impact on existing borrowers.
So unfortunately, those who’d taken out a mortgage, which in today’s world would be considered far above what they could afford, became mortgage prisoners. How? Because they were unable to meet the new, tighter affordability criteria. As a result, any chance of a remortgage was virtually impossible.
BONUS: Could COVID Or Brexit Impact Mortgage Prisoners?
As with all economic crashes, the market doesn’t just bounce back overnight – it takes time to recover. Many experts still maintain that the market is yet to recover from the financial crisis of 2008, so when you consider Brexit and COVID, we could well be in for another economic low.
The Centre for Economics and Business Research (a government think tank) predicted at the start of the pandemic that house prices would drop 14% in the coming year, so that may well be the case. A situation that could very easily lead to a spout in mortgage prisoners in the UK, as negative equity becomes a more common scenario. Although hopefully lenders and the government have learned from their mistakes and will do all they can to provide help for mortgage prisoners in this instance.
FYI: The end of the Stamp Duty Holiday is just one of the reasons behind the startling figures above. Discover how we think it’ll affect house prices here.
Could you cope if the market takes a turn? If not, you'd be wise to...
In the quest to become an outright homeowner, getting caught up in a loophole and been labelled as a mortgage prisoner is counterproductive. You want to be paying down your mortgage fast and have the flexibility to switch to a cheaper deal. Besides, we all know that companies favour new customers, so not being able to remortgage leaves you at a BIG disadvantage. But before we dive into exactly how you can avoid becoming UK mortgage prisoners, a word of advice.
As you read through this list you should notice a trend. We’re thinking like a lender, and we’d advise you to do the same. Lenders operate around the concept of risk, so the more you can lower the level of risk you present them with the better. Also, the less likely you are to be trapped in your current mortgage deal because you made a wrong move in the heat of the moment. So here they are – our top ways to stay on your lender’s good side and avoid becoming a mortgage prisoner in the UK…
- Put down a decent deposit - Sounds simple, but as you’ve probably figured by now, the more equity you have in your property, the less chance you have of becoming mortgage prisoners. This is because you’re less likely to enter negative equity if the market slumps – a great situation for both you and your lender. Mortgage companies typically give their best rates to those with high equity because they present them with less of a risk. The general rule of thumb is higher the equity, lower the interest rate.
- Overpay to prepare for higher interest rates in the future - If you have the money to hand, overpaying your mortgage is a great way to reduce your mortgage term as well as the likelihood of you becoming mortgage prisoners. By overpaying what you’re doing is paying down the principal amount (i.e. the value of your house, not the interest). A by-product of this is a drop in the amount of interest you pay over the remaining length of the loan, as this principal amount (the amount your interest is calculated on) is now smaller. So, in the event of an unstable market, you’re less likely to miss a payment, and even if you do, you look better in the eyes of your lender, because you’ve been overpaying for X amount of months.
- Fix your interest rate – If you’re at all worried about becoming mortgage prisoners, then fixing your interest rate can be simple way to ease your angst. Fix your rate and what you’re doing is in essence protecting yourself should the market slump. You should also find it easier to remortgage as your expenses would be lower and more predictable – exactly what lenders are looking for!
- Remortgage (if you can) –Another strategy that can help reduce the chance of you becoming a mortgage prisoner in the UK, is to remortgage your property with another company or haggle for a lower interest rate. At the time of writing this blog this would actually be a very wise thing to do as the average mortgage interest rates for a 30-year fixed term are at just 2.5%! Bear in mind though that switching mortgage provider can come at a cost, although your new company will often cover these to get you on board as a customer.
- Maintain a solid credit history – Your credit history is like your report card at school – it tells a lender where you’ve done well and how you can improve. So it’s no surprise that keeping it up to an A* standard can drastically reduce your chances of becoming mortgage prisoners. There’s a variety of ways in which you can do so. You could set up a direct debit to pay off your credit cards on time and IN FULL, to prevent any school boy errors from scarring your credit history. You could also lower your credit limit on any cards, so you appear less of a risky prospect. Or even approach the credit agencies themselves and see if you can get any black marks removed.
- Cut down your living costs - As you’ve learnt so far, your ability to qualify for a mortgage or remortgage, is largely influenced by your spending habits. So if like us, you think that in the near future the housing market could begin to fall, nipping those spending habits in the bud, isn’t a bad idea. Especially if you’d be at risk of becoming mortgage prisoners in the event that the market was to turn. Ask us and we’d consider cutting back a good 6 months before you apply, so you can present strong evidence that your spending habits are indeed low, and most importantly, consistent. Here’s a few ideas to get you started: ban those pricy takeaway foods, downsize your car to reduce your payments or switch M&S for Aldi.
Want to calculate how much you could save by overpaying? Click here to calculate your figure.
CASH in the bank - is that what you need?
As of 2021, the latest news around mortgage prisoners is that the Finical Conduct Authority (FCA) has introduced new rules to assist mortgage prisoners in their fight against affordability checks. The FCA’s new rules allow lenders to adapt their affordability criteria to assist mortgage prisoners and help them move onto more competitive deals. This means that as long as an applicant is no in arrears, they’ll be judged purely on their payment history and not using new stringent affordability checks.
How lenders have adopted this can differ. Small or medium sized firms have released new products specifically targeted at mortgage prisoners. Whereas larger lenders have made their existing process more flexible. Another precaution that’s been taken is to reduce stress tests from 3% to just 1%, in the hope that it’ll give mortgage prisoners at better chance of finding a new mortgage deal. For those more elderly prisoners, new interest only mortgages are available.
The new criteria lenders will use to assess applications for UK mortgage prisoners are as follows:
- Must have at least 5 years remaining on your mortgage.
- Have at least £50,000 still to clear.
- Live in a property that’s worth over £60,000
- Have a Loan To Value of no more than 85%, so that’s at least 15% of equity.
- Have the mortgage on your primary residence. Second properties or buy-to-lets are exempt
- Have not at any point changed who the borrowers are on your mortgage. That includes adding them or taking them off.
- Have kept up to your mortgage payment in full for the last 12 months. This does not include an deferrals agreed with your lender or the taking of mortgage holidays.
- Not have a buy-to-let mortgage.
- A clear payment plan if you choose to remain on an interest-only mortgage.
- Some lenders will require evidence that you have received a letter from your current mortgage company explaining how mortgage prisoners could benefit from recent rule changes
NOTE: These will differ depending on the lender. Some may use all of these while others may only use a few. The 4 high street banks that have adopted the new rules are: West Brom, Halifax, Natwest and Santander
What can you do if you don’t meet the new criteria?
If you don’t meet the new criteria there are various mortgage prisoner compensation schemes that you opt to join. A popular choice is the claim offered by Harcus Parker. A law firm that’s handled legal proceedings on behalf of mortgage prisoners who’ve been paying up to 5% in mortgage interest over the past 12 years! And that’s at a time where the majority of homeowners in the UK have enjoyed reasonably low rates. These include prisoners who’ve borrowed through Northern Rock, as well as Bradford & Bingley and Mortgage Agency Services 1-7 LTD.
If you’d like to join the claim you can sign up here, although if you are successful, Harcus Parker will take just over a third of any compensation you achieve.
You could also join the fight against mortgage imprisonment by getting involved with the UK Mortgage Prisoner Support Service. A not-for-profit organisation designed to help mortgage prisoners move on and leave overinflated interest rates behind them. The organisation, along with Money Saving Expert, were the force that pushed the FCA introduce this new legislation to assist mortgage prisoners late last year.
We're not cruel - we offer help for mortgage prisoners just like you!
STEP 1 - Improve your credit history (are you the problem?)
As we’ve already stated, the condition of your credit file is vital if you want escape life as mortgage prisoners. So here’s a few handy hints to get you started…
- Reduce any unsecured borrowing you have, as much as possible. With credit cards the easiest way is to reduce the limit, but bear in mind you should only do this to a level of credit that you can afford. Reduce it too low and it may actually reduce your chances as we discuss further down. Also, if you have any outstanding CCJs, do your best to try and rectify these, as they will substantially affect your credit file.
- Keep an eye on your credit file for any errors. If you spot any, either reach out to your lender or the credit agency themselves. We’d suggest going to your lender first as they understand your situation and may in fact take the blame if there has been a genuine mistake. In the case that doesn’t work, you could also reach out to the credit agencies themselves. These are companies like Experian, Equifax or TransUnion
- Pay all your bills using a Direct Debit to avoid any costly mistakes.
- Remain employed for a good length of time. As a lender the question is all about risk, which means if you can’t show that you’re stably employed then the chances of you escaping mortgage imprisonment are slim. Moral of the story - don't be a job hopper!
- Be careful who you have joint accounts with. Have a joint account with a partner who has a low credit score, then it can actually affect yours too, especially if they’re your spouse. It’s much the same with criminal convictions too. So in this situation you could try remortgaging the house purely in your name if that’s a risk you’re willing to take to escape mortgage prison.
- Discipline yourself in the art of strategic spending. The way you do this is take out a credit card, preferably with a low limit, and spend no more than 25% of your credit allowance each month. An easy way to do this is use it purely as a fuel card. Consistency and reliability are the two things that lenders are after, so if you can demonstrate strict spending then your credit rating should rise. The higher that is, the more likely you are to remain mortgage prisoners.
- Be sure your name is down on the electoral role at your local council. A name on there is a sign to any mortgage lender or credit agency, that you have at least some form of stability.
TIP: For those who’re looking to kick a spending habit, we’d avoid store cards at all costs. Not that they harm your credit rating if they’re used wisely, it’s just that they’re very good at coaxing you into those places where you’re most likely to spend.
STEP 2 - Look at mortgages for Mortgage Prisoners (are mortgages your problem?)
When it comes to considering mortgages, the market and what’s offered is incredibly diverse, which means there’s a heap of factors for you to consider. But that's not to say help for mortgage prisoners isn't out there. You've just got to know where to look...
- 1 - Speak to your lender. In the majority of situations where you’re looking to remortgage, your first port of call should always be your lender. If they’re inactive then it’s likely they’d be unable to assist you. On the other hand if they are an active lender then they may be able to offer you a way out due to the latest rules from the FCA around mortgage prisoners.
- 2 - Reach out to a mortgage adviser. Reaching out to a mortgage broker is an easy way to assess your options as a mortgage prisoner. Before taking any actions towards a remortgage (something that could potentially scar you credit file), it’s important that you properly assess your situation first. What better way to do so than with the help of an expert, and crucially an expert who shouldn’t try and persuade you into doing anything unwise. Reason being that mortgage brokers only get paid when you take out the mortgage, so if there’s a good chance of you failing, they’re going to let you know. Plus, mortgage brokers have a solid knowledge of the whole market so you can be sure that if you can remortgage that you’re also getting the best deal.
- 3 - Opt for a negative equity remortgage. In the case that negative equity is holding you hostage, then there still is a chance of escape. While you don’t see these products actively advertised for obvious reasons, lenders do offer negative equity remortgages from time to time. Whether they’ll give you one or not entirely depends on how sympathetic they are towards your situation. You’d be most likely to qualify for one of these if you come into a new well-paid job, just as you apply, or the person who brings in your household income becomes ill.
- 4 - Look for low equity remortgages So much for a 125 mortgage. Today the most lenient mortgage you’ll likely be able to find will be no more than 90%. However, just like with negative equity remortgages, while they’re rare, it doesn’t mean they’re impossible to get your hands on. In fact, being a mortgage prisoner could actually help you secure one, particularly if you’ve never missed a payment. Just look at it from a lender’s perspective: a borrower who hasn’t missed a payment in X amount of years is enquiring about a high percentage mortgage. Reliable repayments with the promise of a good return – seems like a tempting deal if you ask us.
- 5 - Don't dismiss guarantor remortgages. Don’t be fooled into thinking that 100% guarantor mortgages are just a tool to help young people get a foot on the housing ladder. They can also be a useful way to hook yourself out of a poor mortgage deal, providing you can find a reliable guarantor. Go ahead and this would essentially mean that on paper, the guarantor would take on your mortgage, only it’d be you making the actual payments. Another catch would be that they’d have to put up at least 25% of your property’s value in funds. A jackpot that would be held liable if you were to default. But if money isn’t an issue, you could pay them this yourself. Then remortgage back onto a fixed rate repayment mortgage in a couple of years.
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STEP 3 - Increase your property's value (is your house the problem?)
If you’re a prisoner because low or negative equity, consider this. The whole reason you’re in negative or low equity is because your home is worth far less than it originally was at the start of your mortgage term, right? So why not do some improvements to your house to increase its value?
How you do this of course all depends on your budget and your property. Adding a £15,000 loft extension to a three bed semi in the suburbs may enhance its value by £25,000. But, if you were to spend the same on a mid-terrace in the inner city the increase may only be £10,000. Also, the improvements we’d suggest in this case would be for the most part structural or one that in some way enhances the appeal of your property, like turning the front garden into off-street parking. Remember it’s a surveyor you’re trying to convince here, not a buyer, so straightening your curtains and painting everywhere white isn’t going to make that much of a difference.
Improve your home successfully though and you could get that valuable increase in equity that you’re after to qualify for a remortgage deal.
Here’s a few home improvements that we’d suggest looking into:
- Double gazing
- Extensions or conservatory spaces
- Building a garage
- Adding insulation
- Buying additional land to expand your property’s garden space
STEP 4 - Sell your house to release equity
When it boils down to it, your property is what’s tying you to a broken mortgage deal. You see, as much as you may love your current house, being a mortgage prisoner you’ve got to have an honest conversation with yourself about which you'd rather get rid of. Your current property, or the extortionately high interest rates that come with your loan?
Providing you choose the latter, there’s a variety of ways in which to sell your house as a mortgage prisoner…
- You can go through the open market. Often the slowest way to go, but sometimes your only option if you have exceedingly low equity.
- You could try your luck at a property auction. This route may be faster, but also comes with no guarantee of a final sale price, so you may have to set a high reserve in order to guarantee the equity you need to pay off the loan. A factor that could scare buyers away.
- Opt to use a part exchange scheme – If you’re a prisoner looking to move into a newbuild, you could take advantage of a part exchange scheme, providing you meet the rigorous entry criteria. A decent portion of equity is often one of these and may present a large hurdle.
But, in the case that you do have a good amount of equity, there is another option at your disposal. HINT: It’s been under your nose this entire time.
Being a cash buyer of property, we can buy your house and help free up the funds to write off your existing loan, in just 7-days! The reason we’re so efficient is because our team has over 50 years’ experience in purchasing property and assisting buyers in securing their onward purchase. We’ll even pay for your solicitors and cover your surveys too! Plus, as a special thank you, our team are also willing to use to use their skills in negotiation to get you the best deal on your onward purchase, completely free of charge.
So all that’s left is for you to find it, write off your existing loan using the cash from your sale and put what’s left towards the deposit on your new home. Freedom in 7 days. Who said it can’t be done.
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