Switch mortgage for a better deal, particularly mortgage prisoners

When you switch mortgage, you can potentially save yourself thousands in monthly mortgage repayments over the term of your mortgage.

It's understandable, though, that switching something as financially large as a mortgage might be considered a daunting prospect.

Modern business, particularly ecommerce, is particularly slanted towards encouraging people to shop around for better deals once contracts in goods and services come to an end.

A recent Equifax survey revealed only 7% of Brits would be likely to change mortgage provider if they were unhappy with the service.

By comparison, they would be far more likely to switch energy provider (41%) or phone company (31%).

This inertia regarding mortgage switching by those who can might even be considered bizarre given that there are more than 100,000 unfortunate mortgage holders who have been, to this point, stuck having to make repayments on a mortgage which they are unable to switch from.

This article examines switching mortgage providers, how this can best be achieved while providing some background to the mortgage prisoner situation. 

We consider the following:

The term ‘mortgage prisoner’ came about after the Financial Conduct Authority’s roll-out of the Mortgage Market Review’s new rules in 2014.

Because of the effects of the credit crunch and financial crash in 2008, the FCA saw the need greatly to tighten up lending requirements and make applications for credit, particularly mortgages and remortgages, that much more stringent.

It took measures to ensure that banks held more reserves just in case of an adverse call on them and additionally to stop lenders offering credit to those representing an unacceptable risk.

These new rules meant lenders put in place strict affordability criteria for potential borrowers.

But much trouble has arisen because existing borrowers of mortgages and remortgages, who’d been making their regular monthly repayments, were suddenly faced with these new conditions which resulted in them being ineligible for a new mortgage and so unable to switch.

This meant that those who’d been on fixed rate mortgages which had expired around that time suddenly found themselves trapped on very expensive mortgages because the interest charged automatically reverted, as is standard to their lender’s Standard Variable Rate (SVR) or reversion rate.

This is usually much more expensive than a remortgage deal.

SVR mortgages’ interest rates are normally 2% to 5% higher than the interest rate on a market-leading mortgage.

It is thought there are around 150,000 mortgage prisoners stuck on these rates and not allowed to remortgage because they don't meet the strict criteria.

Seemingly to add salt to the wound in the wake of the crash, although for other macroeconomic benefits, the Bank of England dramatically cut its base interest rate to 0.5%, making for some incredibly cheap mortgages for new applicants and even at press time some years later, the base rate has only risen to 0.75%.

You might have become a mortgage prisoner generally if you’ve borrowed money through a mortgage or remortgage but then your circumstances have changed such that you can’t pass the affordability check on a new mortgage.

Other circumstances can include having a mortgage from a lender which has collapsed and has been sold off to an investor which doesn’t offer mortgage or, for another, a house price fall puts you in negative equity meaning you’re trapped in the sense that you can’t sell or remortgage because you wouldn’t be able to repay or satisfy your lender fully.

At the very least and to stimulate your research, you can go online and look at any number of comparison sites dealing with switching mortgages.

This is certainly a preliminary step. However, you are well advised to book an appointment with an independent mortgage broker.

This is not simply because they can sift through tens of 1,000s of mortgage products to find the right one for your circumstances.

The FCA has become increasingly aware of the plight of mortgage prisoners and has encouraged lenders to relax affordability checks on mortgage prisoners if they apply to switch to better deals, as long as they've kept up their repayments.

An expert independent mortgage broker is much more likely to be aware of lenders who will consider offering such a switch.

In August 2018, a group of 59 authorised lenders who accounted for 93% of the UK residential mortgage market agreed to help up to 10,000 mortgage prisoners who have mortgages with authorised lenders.

The broker will also be aware of expected eligibility conditions, thus saving you from a failed application. These conditions can include, for example:

From a debt perspective, you should switch out of a costly SVR mortgage as soon as possible. For those on a fixed rate, you must wait until the fixed period expires in the normal way, otherwise you'll face hefty early repayment charges.

You might consider any or all of the following: