In previous issues this year we looked at remortgaging basics – what to watch out for, how to be sure you have got the best deal, when is the best time to switch. This time Vanya Damyanova investigates more complex cases, falling under the category of the so-called “mortgage misfits” or “mortgage prisoners”
With more than eight million mortgage holders in the UK, remortgaging is a huge chunk of the business. And given that customers do not remortgage just when their contract expires but switch between deals and often between lenders for various reasons, the market is always brewing.
In recent years getting a new loan has become more complicated than just choosing an offer that suits you. The financial crisis changed the landscape and now more borrowers than before may face considerable challenges when trying to find a new arrangement.
The ripple effect of a base rate rise
The rock-bottom interest rates are a particular cause for concern, many experts say. Keeping the base rate at the record-low level of 0.5 per cent since 2009 has been a way for the Bank of England to provide some breathing space for the volatile financial markets and support economic growth. Even though the Bank has said it is in no hurry to raise the base rate, the market expects it to go up in the middle of 2016.
Falling through the cracks
In the wake of the financial crisis lenders were faced with new, tighter legislation for advancing loans. The Mortgage Market Review (MMR) launched in April 2014 requires lenders to do thorough checks before advancing a loan. The increased pressure on lenders affected customers. In many cases, people who had received mortgages under the old requirements were no longer deemed eligible for a mortgage after the MMR. The Financial Conduct Authority (FCA) had taken into account that some borrowers may fall through the cracks as a result of the new legislation and included the so-called Transitional Arrangements Clause in the MMR especially for such cases.
Those borrowers are dubbed “mortgage misfits” or “mortgage prisoners”. In most cases these are self-employed, self-builders and older customers, whose mortgage term will run past their retirement.
According to estimates from the Resolution Foundation around 770,000 households in the UK fall into two potentially problematic categories of mortgage borrowers:
- Those already at risk of being “mortgage prisoners” because of their limited ability to switch to better deals in order to insulate themselves against future rate rises.
- Those facing the likelihood of becoming “highly-geared” – with their monthly mortgage repayments eating up at least one-third of their disposable income by 2018 as interest rates rise.
The Foundation’s research shows that a third group, falling into both categories at the same time, is the most vulnerable.
What options do mortgage misfits have?
Currently, not many lenders are taking on “transitional” cases and the choices are limited for borrowers stuck in their current mortgage deal. The Melton and Ipswich building societies are among the few providing options for mortgage prisoners.