As the cost-of-living crisis bites, Fiona Nicolson looks at how advisers can support clients who are unable to switch to a cheaper mortgage
A ‘cost-of-living crisis’ can encourage many people to take a long, hard look at their finances, to determine where savings can be made.
As the mortgage is often the biggest outgoing, switching to a cheaper home loan would seem to be a good starting point. But for some people, known as ‘mortgage prisoners’, this option is not available.
The Financial Conduct Authority (FCA) defines mortgage prisoners as borrowers who could potentially benefit from switching to a new mortgage deal but who are unable to, despite being up to date with their mortgage payments.
There are a number of reasons for this, including a change of personal circumstances since they took out their mortgage, such as losing their job. Different lending practices nowadays are another factor: some mortgage prisoners took out their home loan before the financial crash of 2008, when lending criteria were less stringent than they are today. This means they are often stuck on more expensive mortgages.
And this is having an impact, as Lea Karasavvas, managing director at Prolific Mortgage Finance, says: “Mortgage criteria change over time but we have seen more change during the last few years in criteria and assessment than we have for a long time, creating more mortgage prisoners than ever.”
Phil Anderson, director at Phil Anderson Financial Services, is seeing the issue at first hand, as he explains: “We come across mortgage prisoners on a regular basis. We are tending to find that they are often people who bought new-build properties in the last few years.
“In some cases, the property value has fallen and clients in this position find it hard to be able to remortgage onto a better deal. We work with these clients to look at the options with their existing lender to see what is available to them. If we come across clients who are struggling, we signpost them to organisations who can help with debt advice.”
He adds: “Brokers must also be on their guard for vulnerable clients, as this can often be the case with mortgage prisoners.”
The FCA has been keeping a close eye on the plight of mortgage prisoners and has taken action to alleviate the situation. Most recently, it launched a mortgage prisoner review, to provide data for the government and to help identify practical solutions for these borrowers.
The results of the review, presented to parliament in November last year, demonstrated the size of the problem, revealing a total of 47,000 borrowers meeting the definition of mortgage prisoners. The review also found that 34,000 borrowers were in ‘payment shortfall’.
Brokers need to be aware of the options that could be available for mortgage prisoners, but of course need lenders to embrace and expand their offering to enable as many borrowers to be helped as possible
Brokers need to be aware of the options that could be available for mortgage prisoners, but of course need lenders to embrace and expand their offering to enable as many borrowers to be helped as possible
Breaking out
In February this year, the regulator set out its expectations for supporting customers in financial difficulties and mortgage prisoners, in a letter to lenders.
It proposed that lenders act in the interest of the customer and take account of their individual circumstances, including their other debts and essential living costs; and that they should help them manage their finances, referring them to debt-advice organisations, if required. The FCA also highlighted the importance of recognising and responding appropriately to vulnerable customers. In addition, it asked lenders to have systems, processes and trained staff in place to meet these expectations. On the issue of mortgage prisoners, it encouraged lenders to consider amending lending criteria.
So, what can brokers do to support the efforts of the FCA and lenders, to help mortgage prisoners and others who might be struggling to pay their mortgage?
Mr Karasavvas emphasises that brokers should be proactive, as he says: “Brokers need to be aware of all assistance we can give clients right now. We need to be up to date on our continuing professional development (CPD) and to stay informed about beneficial tweaks lenders are implementing, to ensure we have the tools and knowledge to best assist our clients.”
A two-pronged approach is required, according to David Hollingworth, associate director, communications at L&C Mortgages: “Brokers need to be aware of the options that could be available for mortgage prisoners, but of course need lenders to embrace and expand their offering to enable as many borrowers to be helped as possible.”
He adds: “The recent FCA letter regarding the need to support customers dealing with the impact of the cost-of-living increases is another reminder of how a greater number of mortgage options could help.”
Mr Anderson also points to the need for change, anticipating that the situation is likely to worsen: “We are finding that lenders are not allowing clients to borrow as much now as they were earlier in the year, due to the cost-of-living crisis, soaring energy bills and spiralling food prices. That will lead to more mortgage prisoners.”
He concludes: “Hopefully, we will see more innovation from lenders for mortgage prisoners. Many people are going through such a hard time at the moment, it would be good to see the government and lenders offering more support to those struggling.”
Fiona Nicolson is a freelance journalist
