Mortgage Prisoners: 800,000 homeowners urged to switch to cheaper mortgages

Mortgage Prisoners: 800,000 homeowners urged to switch to cheaper mortgages

Many homeowners became trapped as a result of the financial crisis in 2008, whereby their mortgage rates and affordability terms changed dramatically and many had their mortgages sold to private investors as part of bailing out various banks, with no choice but to accept terms given to them.

Mortgage Prisoners: 800,000 homeowners urged to switch to cheaper mortgages

The Financial Conduct Authority estimates around 800,000 homeowners are currently overpaying for their mortgages and could be saving up to £4,000 each per year.

The City Regulator has put forward recent proposals to help ‘mortgage prisoners’ which currently affects an estimated 120,000 households in the UK. This group are currently unable to get new mortgage deals or remortgage due to a range of circumstances, and it is currently putting them on much higher standard variable rate, charging up to 5% or 6% for their mortgage per month.

Many homeowners became trapped as a result of the financial crisis in 2008, whereby their mortgage rates and affordability terms changed dramatically and many had their mortgages sold to private investors as part of bailing out various banks, with no choice but to accept terms given to them.

Many enjoyed 100% mortgages or being able to borrow 7 times their salary, which has since been slashed to 4.5 times at most. But this has had profound effects on their mortgage terms, and for some, it has made getting a new mortgage deal unfeasible.

You can also become a mortgage prisoner if you see a big fall in salary or fail to meet your provider’s new, stricter affordability checks (due to too many outgoings or bad credit). Or similarly, if you become a first time buyer, but the over the next few years, the mortgage lender reduces the amount you can borrow against your salary.

These circumstances have left many mortgage prisoners paying huge amounts and unable to change their scenario, meanwhile switching to different remortgage deals could offer just 1-2% per month and save the household up to £4,000 per year.

Households ‘unaware’ of cheaper deals

The FCA estimates that up to 800,000 homeowners in the UK could in fact be paying much lower rates, without their knowledge.

The regulator states that people should not get used to paying high amounts for their mortgages and should seek new deals and remortgages, and make the most of introductory offers and consult other lenders where possible.

What options are available for mortgage prisoners?

Meeting the stricter affordability checks for mortgage providers and banks is very important. If you can find ways to increase your salary (easier said than done), this can certainly help. But perhaps lowering your household costs and outgoings will make a big difference too, to show that you have improved affordability. Some simple savings could include reducing your monthly spend on food and takeaways, joining a cheaper gym or quitting smoking.

Whilst not always easy, overpaying on your mortgage will reduce the amount outstanding and therefore be cheaper long-term. The sooner that you can get out of your contract that holds you a prisoner, the better.

Downsizing or increasing any cash in your home can also help. If your children have flown the nest, downsizing to a smaller property can help free up your finances and get your out of the mortgage trap. Around 80,000 homeowners over the age of 55 have used equity release in the last year as a way to release cash from their home. This can be an expensive product, but usually causes you to pay off your mortgage in the process and give you enough cash for the remainder of your lifetime. There is also no tax on this product and will not incur inheritance tax either.

Moving home can be very tricky, unless you are downsizing and borrowing lower amounts. Many households have reverted to bridging loans, which can provide an effective way to borrow money if moving house (without having sold yours). But this can come with huge risks if the housing market crashes and if you fail to sell your home, you could be at risk of repossession.


Daniel Tannenbaum, Consultant for Fintech and financial companies

 

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