With interest rates at a historically low level, you may think that today’s mortgage market is a borrower’s paradise.
Yet a series of regulatory changes – plus a dose of self-interest from mortgage lenders – has left many homeowners feeling like they’re facing one of Ant and Dec’s bushtucker trials.
These homeowners are the UK’s mortgage misfits – trapped on high interest rates and paying more than they need to. Many consumers are affected but those who are self-employed, have an interest-only mortgage or are borrowing later in life are among those most at risk.
The mortgage jungle
One of the major causes of the global financial crisis in 2008 was the number of sub-prime mortgages given to borrowers who had little or no chance of paying them back.
Since the crash, the focus in the UK has been on increasing regulation to ensure similar problems don’t arise in future. Regulator the Financial Conduct Authority (FCA) implemented new rules under the Mortgage Market Review in 2014 and this was followed by new European-wide regulations under the EU Mortgage Credit Directive in 2016.
Mortgage borrowers now face more financial checks than ever before. Lenders will look at your debts, income, outgoings, number of children and lifestyle during the application process.
Your bank or building society will also test whether you can afford to pay back the loan both now and if interest rates were to rise significantly in future.
These are known as affordability tests. And while making sure customers can pay back loans is sensible, the strict way these rules are applied have left many borrowers trapped with their current lender and paying over the odds.
Even if you have been paying off your mortgage on time every month and your circumstances haven’t changed, the lender can refuse to transfer you to another product if you do not meet its affordability criteria. Banks are able to do this even if the new monthly repayments would be lower than what you currently pay.
These customers are often described as mortgage prisoners. John Phillips of mortgage broker Just Mortgages believes there could be as many as a million customers trapped in this situation.
“It is undoubtedly a good thing that lenders make sure that homeowners are only taking on a debt they can afford in the future,” he says. “But these rules also apply to those who already have a mortgage. Some borrowers whose circumstances have not changed since taking out their loan now no longer meet the necessary requirements and are unable to get a new mortgage.”
Who are the mortgage misfits?
Anyone can become a mortgage misfit, but you are more likely to get into difficulty if you’re a non-standard borrower. This can include, but is not limited to, borrowers with an interest-only mortgage, older people, the self-employed, contract workers, foreign currency earners and people who have lived overseas.
Some suggest big lenders are making it deliberately difficult to switch because it’s more profitable for them. Put simply, why allow a customer to move to a low interest rate when they can keep charging them a higher one?
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “It might make commercial sense for a lender to keep a borrower on a high standard variable rate (SVR), but it is clearly not in the borrower’s best interests.
“Nor will it reflect well on the lender if lots of older borrowers, for example, find themselves in financial difficulty and potentially repossessed in future because they cannot afford these high mortgage payments.”
But while you might think you don’t need to remortgage because you believe you’re on a competitive interest rate, that’s likely to be because it’s lower than you have been paying in the past. Yet borrowers could still be paying over the odds if they’re stuck on a lender’s SVR.
The average two-year fixed rate mortgage costs 2.33%, according to Moneyfacts, yet the cheapest SVR of a high street bank comes from HSBC at 3.69%. Some lenders charge much more – Newcastle Building Society sets its SVR at an eye-watering 5.99%.
Mr Harris says: “If you are on your lender’s standard variable rate because you have come to the end of a fixed or variable deal, then you should always ask your lender what it is prepared to do for you.
“It usually pays to shop around and compare your deal with what else is on the market, so don’t assume you are a mortgage prisoner with no other options available to you.”
Beat the rules
If you’re trapped on your current mortgage deal, it can be a difficult and demoralising experience. But there are other providers who may be more accepting of your circumstances.
Each bank sets its own affordability criteria, and these requirements can vary wildly between lenders. High street banks generally use a computerised process, which does not take into account your previous rate or any complex circumstances.
Smaller lenders and regional building societies tend to underwrite mortgage cases manually, with a real person making the final approval decision. These lenders are increasing their share of the market as more people are turned away from big banks.
Mr Harris says: “The good news is that some lenders are becoming more flexible and realising that they can’t cut their rates any lower to attract new business – if they want to appeal to more customers, they could target those groups who are struggling to get funding by tweaking criteria.”
Jeremy Wood, chief executive of Dudley Building Society, says he has seen a flood of borrowers rejected by the big banks.
“We are seeing an increasing number of applications from people falling foul of the rigorous and standardised approaches adopted by the larger lenders,” he says. “It doesn’t necessarily mean these customers are a higher risk, but these cases require a deeper understanding of a customer.”
Mortgage misfits may find it useful to talk to a mortgage broker about their situation, as they will understand which lenders will be most receptive to their circumstances. But remember, you can also make changes yourself to get your finances in top-top shape. This includes paying off any other high interest loans, such as credit cards, and avoiding any major lifestyle changes where possible.
Charles McDowell, director of mortgages at Aldermore, says: “Maximising your creditworthiness history can help; there are a number of credit bureaux that provide credit reports such as Call Credit, Equifax or Experian. These are a great way to understand your credit history and can help improve your financial health.
“You should also try to increase your deposit by saving or alternatively reducing your existing mortgage balance by overpaying. Both of these should make it easier to remortgage.”
The FCA is due to report in summer 2017 on whether the rules introduced under the Mortgage Market Review have led to outcomes that are not in the best interests of consumers.
Mortgage misfits may remain hidden under the surface at present, but this is likely to become a bigger issue when interest rates start to rise. Some people have escaped becoming mortgage prisoners thanks to rising house prices reducing their loan-to-value ratios, but price growth has slowed considerably in recent months and this cannot be relied-upon in future.
When rates rise borrowers will see their monthly repayments rocket and some could be sent into arrears. They’ll also have missed out on today’s low interest rates by that point.
Mr Phillips says: “According to a top policymaker at the Bank of England, interest rates may need to rise soon in order to keep a lid on inflation.
“Those who are stuck on SVRs will certainly be affected when interest rates rise. Generally speaking, the SVR the borrower is paying will be higher than the rate they were on before. In these circumstances, many of these borrowers will slip into arrears and eventually result in repossession.”
How to avoid becoming a mortgage misfit
- Remortgage at the end of your fixed period. Mortgage offers last six months so you can prepare in advance
- Never remain on the standard variable rate for too long; you’ll usually cut your monthly repayments by moving elsewhere
- Overpay your mortgage where possible – the smaller your mortgage balance, the cheaper rates you can access – although do check first if there are any early repayment penalties.
- Talk to a mortgage broker. These advisers can help you locate deals not on the high street and match with lenders that suit your circumstances. You can find a broker local to you using websites such as Unbiased.co.uk.
- Avoid major lifestyle changes and budget sensibly. If your circumstances have changed significantly, this can cause you to fail an affordability test.
“I felt trapped and frustrated”
Rod and Sue Elston live in Exmouth, Devon. Rod, 72 (above), is a Baptist minister and Sue, 69, is retired. They wanted to take their existing mortgage to their new home – known as ‘porting’ – but because of their age, their lender refused them.
The couple had around £48,000 left on a repayment mortgage at a rate of 6.53%. They had a good payment history but their application was refused, despite the fact monthly repayments would not have increased.
“I’d been with my former lender for 10 years and was a long-term account holder but it said the rules had changed and now I couldn’t get a mortgage,” says Rod.
“I felt trapped and frustrated because I’d paid my mortgage on time every month. My income hadn’t gone down – in fact, it had gone up!”
Rod struggled to find a mortgage on the high street, but eventually found a deal from the Family Building Society online. It gave him a new 14-year mortgage at a rate of 1.94%, which suited his circumstances. But he still feels the rules make life unnecessarily difficult for good borrowers like him.
“The common-sense approach would have been to say that we know his history and we know he’s a good customer – but the rules don’t allow it."