Thousands of home owners ‘kept prisoner’ by their loan

TENS of thousands of home owners are trapped in expensive mortgages taken out before the financial crisis because of new rules stopping them from moving to better value loans.

There are 30,000 such “mortgage prisoners”, according to the Financial Conduct Authority, who, thanks to low interest rates, are being denied the chance to remortgage and save thousands of pounds each year.

The City watchdog is looking for ways to help these borrowers, who are up to date on payments, but it is difficult without undermining its own rules.

One problem is that tougher affordability tests now apply to lending, meaning someone who qualified for a loan in 2008 may not do so now – and that has meant many people with expensive existing loans are deemed unable to afford a new, cheaper one.

Around 10,000 of these “prisoners” hold loans with active lenders and the FCA is looking at a voluntary arrangement under which it asks their current bank or building society to switch them on to a new deal.

However, the other 20,000 took out mortgages with lenders that have gone bust or been merged and their mortgage books were sold off after the crisis. The danger is that those on standard variable rates will suffer as rates rise.

“There’s a mortgage ticking time bomb in the UK,” said Martin Lewis from Money Saving Expert. “Standard mortgage rates are soaring way above UK base rates and if interest rates rise there is a huge risk of arrears and repossessions. This has to be prevented.

“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 in a dire place is interestonly borrowers. These loans were popular before the financial crisis but banks have typically ditched them as they relied on rising house values to keep borrowers from going into negative equity. As a result, borrowers have struggled to switch to new products.

Bank of England data does, however, suggest things might be improving with a 45 per cent rise in interest-only lending in the third quarter of last year, compared with a year earlier.

Overall, the mortgage market works well, the FCA added, as most borrowers do shop around. But those who don’t look for the best deal, collectively miss out on as much as £1bn a year.

The FCA found 120,000 borrowers who could get a better deal, but have not switched away from old loans. In addition, around 800,000 others have moved off their original deal but are still not on the cheapest loans available.

They could save around £1,000 each per year, the FCA estimates – saving £1bn annually if they shopped around.