Thousands of "mortgage prisoners" trapped for years by expensive loans will be able to move to cheaper deals under new lending rules
The Financial Conduct Authority (FCA) has confirmed that affordability checks have been relaxed to allow customers stuck with expensive mortgages to switch to a better product.
The new rules will affect an estimated 30,000 customers who have not been able to move to a more affordable mortgage despite being up to date with their monthly payments.
"Responsible lending is hugely important, and unaffordable borrowing is a cause of significant harm.
"We are removing barriers to switching in our rules and we would like to see firms make changes to their own processes quickly in order that customers can benefit as soon as possible," says Christopher Woolard, executive director of strategy and competition at the FCA.
"We are also taking steps to help those who have mortgages with inactive lenders or unregulated entities to ensure that they are aware that they may now be able to switch and save money," he adds.
The new rules allow lenders to use "more proportionate" affordability checks for customers who meet certain criteria, such as being up-to-date with payments under their existing mortgage and not looking to move house, or borrow more.
The proposals also aim to reduce the time and costs of switching mortgage.
Affordability checks were tightened during and after the 2008 financial crisis and were followed by more stringent lending standards. This led to customers being stuck on mortgage products with high interest rates unable to switch to new loans because they no longer met the criteria.
Interest rates are now at an historic low and yet thousands of consumers have become "mortgage prisoners" stuck with payments significantly above the market rate through no fault of their own.
The financial regulator says the new rules have now removed barriers preventing some mortgage customers from finding a cheaper deal.
But Martin Lewis, founder of MoneySavingExpert warns that there are still more than 100,000 mortgage customers stuck in a financial trap and the new rules will only unchain "a tiny fraction of the UK’s mortgage prisoners".
He adds: "Mortgage prisoners are victims of irresponsible pre-crisis lending. As a result of the banks’ reckless behaviour they were often given mortgages which were too large – sometimes up to 125% of their income.
"Post-crisis, when lending rules tightened up, they were left out in the cold, unable to benefit from competition and therefore exposed to a decade of expensive standard variable rates – the type most mortgage customers want to run from. Some were sold on, by the state, to unregulated and inactive lenders as a financial asset.
"The damage this has done to their finances means many of these consumers are now unattractive to most lenders and prevented from accessing the most competitive rates – and the FCA has no way to force or incentivise firms to take them on. It is now time for the government to act."