How to avoid becoming a mortgage prisoner

Thousands of mortgage prisoners, borrowers stuck with an unfavourable interest rate, are taking TSB to court over the interest rates it is charging borrowers.

Law firm Harcus Parker, which is bringing the case, claims mortgage borrowers were "left trapped" and paying "well over market interest rates", said the Financial Times, when their loans were transferred from collapsed lender Northern Rock to TSB amid the 2008 financial crisis.

Harcus Parker says these borrowers – whose mortgages were purchased through a loanbook called Whistletree – have become mortgage prisoners and should have been moved to TSB's lower standard variable rate (SVR).

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The average claim is estimated to be worth £20,000 to £30,000.

TSB has strongly denied these claims, saying borrowers have been offered alternative deals.

The case highlights the plight of mortgage prisoners in the aftermath of the 2008 financial crisis and bank bail-outs that saw mortgages transferred from failed banks including Northern Rock and Bradford & Bingley to inactive lenders "who charged higher rates than traditional high-street lenders", said YourMoney.

Reforms to bank lending since the credit crunch have left some borrowers unable to switch to a new rate, added the financial website, "because they do not meet the affordability criteria" – making them mortgage prisoners.

Tens of thousands of homeowners are believed to be mortgage prisoners, mainly those who "bought or remortgaged before 2014", said MoneyHelper, and who received a mortgage prisoner letter from their provider before January 2020.  

However, there may be some action that mortgage prisoners can take.

What is a mortgage prisoner?

A mortgage prisoner is someone "trapped in unfavourable mortgages with higher rates", explained Matthew Sparkes, assistant professor in sociology, on The Conversation.

People particularly affected are those who took out mortgages pre-2008 and before tougher lending criteria were introduced under the Mortgage Market Review in 2014, said YourMoney, "designed to encourage responsible lending".

This means that even if you passed an affordability test before 2014, added MoneyHelper, "you might not pass the test now", leaving homeowners trapped and "without the option of switching to a better deal".

You can also be classed as a mortgage prisoner if the amount owed on your mortgage is higher than the value of your property, putting you in negative equity, said NerdWallet, making it difficult, "if not impossible", to remortgage. 

Why are mortgage prisoners still facing difficulty?

There could be around 200,000 mortgage prisoners in the UK, according to MoneySavingExpert.

Borrowers typically have mortgages with "closed book" firms that are no longer lending to new customers, added the financial website, and don't fit modern-day criteria.

Many opted for interest-only deals pre-2008, added Sparkes on The Conversation, but the financial crisis "hindered their capacity to remortgage, and caused their interest rates to skyrocket".

Their situation has been exacerbated by the Bank of England's recent interest rate hikes, added the news website. Most mortgage prisoners are on variable rates that were "immediately exposed" to the rises and have increased to above 7%, while may have low credit scores, "locking them into their mortgages".

What to do if you are a mortgage prisoner

New rules were introduced by the Financial Conduct Authority in 2019 to "remove regulatory barriers to switching".

The City watchdog introduced a modified affordability assessment that let lenders consider a borrower's payment history and reliability "instead of their income and spending", added NerdWallet. Inactive lenders can also offer borrowers the option of moving to an active lender within the same financial group "without an affordability assessment".

This option is "open to all", added MoneySavingExpert, but it is the lender's choice and many mortgage prisoners "will find they won't get it".

Speaking with a mortgage adviser can help "understand your options", said Rest Less, "and get a great deal on your mortgage".

Other options include seeing if your lender will let you "defer your payments for a short period of time, or extend your mortgage term", added the financial website, but remember "any support they offer you will go on your credit report, and may affect your ability to borrow in future".