Thousands of “mortgage prisoners” could get cheaper deals but are banned from switching
Thousands of homeowners face years of paying mortgage interest rates that are far higher than they need to be, the finance regulator has said.
And it says people need more help to escape these extortionate rates and switch to better deals.
The Financial Conduct Authority (FCA) says these high-interest-rate mortgages were taken out before tougher rules on affordability were brought in following the financial crash a decade ago.
When a current deal ends, mortgage prisoners find they can afford the repayments on a new fixed deal, but that they don’t qualify for it because of the tighter rules around home loans.
The FCA says just under a third of all mortgage payers fail to switch and find the cheapest mortgage deal.
But it says competition has worked well for other homeowners.
The FCA's comments are part of an in-depth report on the mortgage market.
Christopher Woolard, director of strategy and competition at the FCA, said: "For many, the market is working well, with high levels of consumer engagement.
"However, we believe that things could work better with more innovative tools to help consumers.
"There are also a number of long-standing borrowers that have kept up-to-date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them."
Some mortgage payers were trapped in their current deal when, in 2014, much stricter rules on the kind of mortgage packages that could be offered were introduced.
These "mortgage prisoners" can’t move to move to a better deal when their current mortgages switch back to the more expensive standard variable rate, even if they could meet the payments. This is because they don’t meet the criteria demanded in the new rules.
The FCA says there are around 150,000 of these homeowners – effectively stuck on expensive standard variable mortgages; about 30,000 of these were with authorised mortgage lenders, but about 120,000 had mortgages with non-regulated firms, including those who were previously with Northern Rock and Bradford & Bingley.
The regulator says it will look at ways to help these customers.
One possibility is "an industry-wide agreement to approve applications for a new mortgage deal from existing customers whose most recent mortgage was taken out before the financial crisis and who are up-to-date with payments".
The regulator says there is now lots of choice in the mortgage market, with 75% of borrowers switching to a new deal within six months of moving on to a standard variable rate.
But it says there is no easy way for customers to be sure which mortgage deal they might qualify for, and this was "a significant impediment" to people shopping around.
The FCA also says a "significant minority" - about 30% - of customers failed to find the cheapest mortgage.
It wants to make it easier for borrowers to see what mortgages they qualify for.
It’s consulting on its findings and proposed solutions, and will publish a final report and recommendations around the end of this year.
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