Affordability.
A regular issue among the UK Mortgage Prisoners is that their personal circumstances have changed.
With a fixed rate mortgage, a lender agrees to offer a low rate for a set term. Running up to 2008, Northern Rock “Together” mortgages were based on a fixed term of 5 years. At the end of the 5-year term, the borrower would traditionally flip the mortgage to a new lender to get a better deal. At this point, the borrower would aim to secure a different type of mortgage. For example, switching to a repayment model from an interest only one.
All of this becomes problematic if a persons credit rating, earning potential or ability to pay is affected. Many customers found themselves unable to take a new deal because of illness, redundancy, or a catastrophic financial event. Unable to switch, the customer was then expected to pay the SVR (Standard Variable Rate). This rate was often considerably higher than the market rate of the time. Post-2008, when interest rates fell dramatically, that situation was only exasperated.
When applying for new loans they are told that they do not pass the affordability test. This creates the classic Mortgage Prisoner dichotomy. The borrower may now be paying £1000 a month and be told that they cannot afford to pay a mortgage of say, £500…
#CantAffordToPayLess
Negative Equity.
A property is in negative equity if it’s worth less than the mortgage secured on it, and it’s normally caused by falling property prices.
For example, if you had bought a property for £150,000, with a mortgage for £120,000 and the property is now worth £100,000, you would be in negative equity.
It’s estimated that there are around half a million properties in negative equity in the UK, although some areas are affected far more than others.
It can also be difficult if you want to remortgage; perhaps to a fixed rate or a cheaper deal. Most lenders will not let people with negative equity switch to a new mortgage deal when their existing one ends. Instead, they will normally be moved onto the lender’s standard variable rate.
In 2008, the world financial collapse destroyed the hopes and dreams of millions. Those that were now on the housing market with mortgage contracts were hit hard. Many were up to date with their mortgage payments and paying significantly more than their friends and relatives. The dive in house prices and confidence left swathes of people trapped in homes that now carried negative equity.
Mortgage Sold On.
Perhaps the most well-known example of this followed the demise of the high street lender Northern Rock. Over 100,000 borrowers took out subprime or high-risk mortgages with Northern Rock.
After the collapse of the Lehman Brothers and their UK associate Northern Rock, customers were faced with an uncertain future. Following a UK government bailout, a large number of customers found themselves transferred from the main companies loan book to so-called “Vulture Funds”.
These vulture funds are private equity groups who often have no lending licence. As a result, they have no way of offering a new loan. If a person’s property is in negative equity, or if the person is in arrears with their mortgage, there is very little chance of being able to escape to a new lender.
Many have found that their new fund management company has capitalized by keeping them on extortionately high-interest rates. Others have been hounded, harassed and bullied. Being unlicensed and unregulated, a vulture fund can operate at the edges of what is considered acceptable. Often their sole aim is to push for as much money as they can until something breaks.
Retirement Age
A study carried out by broker Retirement Mortgage Service over the past year (2019-2020) found that more than 30,000 retired borrowers got in touch with their advisers, with 2,540 making a full application to refinance their mortgage.
But just 438 of these customers were able to refinance onto another mortgage, a retirement interest-only mortgage or a lifetime mortgage.
Mortgage lenders have limits on how old a borrower can be when they take out a loan and how old they will be when it ends. The closer the borrower is to the maximum age, the less time they will have to pay off any new mortgage.
This raises monthly repayments, making lender affordability tests more difficult to pass – especially for those who rely solely on pension income - making it much more difficult for older borrowers to qualify for deals.
This is particularly worrying for the thousands of interest-only mortgage holders who are set to see their loans mature with no repayment plan in place in the next few years – one in nine of whom are over 65 years of age.
Previously the only option for many older borrowers with mortgage debt they couldn't repay was to sell their home and hope they had enough equity to fund the purchase of a smaller property.
But with house prices having rocketed over the past 20 years, it's not always possible. This left thousands of borrowers unable to repay their loan, unable to remortgage and unable to afford to downsize.
According to the Financial Conduct Authority's most recent figures in 2018 there were 1.67million full interest-only and part capital repayment mortgage accounts outstanding in the UK.
This amounts to around one in five outstanding mortgages. One in nine of these is held by over-55s, equal to around 185,370 households.
Ex-Partner’s name on the contract.
The end of a relationship can be a stressful time, particularly if you share a financial commitment, like a mortgage. If you and your partner are splitting up, or have split up you may want to take their name off the joint mortgage.
Removing an ex-partner from the mortgage and deeds is possible with a Transfer of Equity if you meet the lender’s criteria. This is often when the partner who wants to take over the mortgage becomes trapped by not passing the strict affordability rules.
In some cases this has continued for some time. Despite proving years of solely paying the full contractual monthly payment, when applying for a better deal the remaining partner is told they ‘Can’t afford to pay less’.