Tens of thousands of British homeowners are trapped in expensive mortgages which they took out before the financial crisis because of new rules stopping them moving to better value loans.
There are 30,000 such “mortgage prisoners”, the Financial Conduct Authority (FCA) revealed, who, thanks to low interest rates, could each save thousands of pounds in repayments each year – if only they could remortgage.
The City watchdog is looking for ways to help these borrowers, who are all up to date on their mortgage payments, but it is difficult without undermining its own rules.
A key problem is that tougher affordability tests now apply to new loan applicants.
This means that someone who qualified for a loan in 2008 might not do so now, leaving them trapped in a position where they are paying for an expensive loan, but deemed unable to afford a new, cheaper loan.
Around 10,000 of these prisoners hold loans with active lenders, so the FCA is looking at a voluntary arrangement under which it asks their current current bank or building society to switch them on to a new deal.
However, the remaining 20,000 are with finance firms that do not issue new loans, such as Northern Rock or Bradford and Bingley, because their mortgage books were sold off to investors after the crisis.
The danger now is that those on standard variable rates will suffer when interest rates rise.
“There’s a mortgage ticking time bomb in the UK. Standard mortgage rates are soaring way above the UK base rates and if interest rates rise there is a huge risk of arrears and repossessions. This needs to be prevented,” said Martin Lewis from Money Saving Expert.
“The FCA is suggesting a possible voluntary agreement with the lenders – if that will work, great. If not, then it needs to force them.”
One group that is particularly affected is interest-only mortgage borrowers. Interest-only mortgages were popular before the financial crisis but banks typically ditched them afterwards because they relied on rising house values to keep borrowers from getting into negative equity.
As a result, these borrowers have struggled to switch onto new products as interest-only loans have been hard to find.
Bank of England data do, however, suggest things might be improving: there was a 45pc rise in the volume of interest-only lending in the third quarter of last year, compared with a year earlier. This indicates there are increasing options for this class of mortgage prisoner.
Borrowers are shopping around – but some still lose out
Overall, the mortgage market is working well, the FCA added, as most borrowers do shop around for a good deal, and then shop around again when any fixed-term offer comes to an end.
Those who don’t search the market for the best deal are together missing out on as much as £1bn of savings per year.
The FCA found 120,000 borrowers who are not ‘prisoners’ and would be able to get a better deal, but have still not switched away from old loans with non-lending finance companies.
In addition to these, around 800,000 other mortgage borrowers have moved off the original deal they signed up for but are still not on the cheapest loans available.
They could save around £1,000 each per year, the FCA estimates – meaning there are almost £1bn of annual savings available, if borrowers shopped around more actively.
The regulator is also looking at other ways to improve the mortgage market. It wants to make it easier for customers to compare mortgage products and to find out if they are eligible for them. It is also building a scorecard to rate mortgage brokers.