Earlier this month, a landmark report was published by the London School of Economics and Political Science (LSE) that puts forward a practical proposal for freeing mortgage prisoners.
The report, which was commissioned by MoneySavingExpert.com and funded by a private donation of almost £60,000 by Martin Lewis, puts forward a number of possible solutions that would help prisoners eventually remortgage with active lenders. As of March 10, Economic secretary to the Treasury, Andrew Griffith, has confirmed that he will read and seek official advice on the proposals put forward in the report.
Responding to a written Parliamentary question, Andrew Griffith said, “The Government understands that being unable to switch your mortgage can be extremely stressful. We will consider the proposals put forward in this very recently published report carefully.”
Who are mortgage prisoners?
Mortgage prisoners are home loan borrowers who have been trapped at high rates since the 2008 financial crisis. Many have loans that were sold by the state to ‘closed book’ inactive lenders – largely investment companies that are not regulated to lend new mortgages – making it difficult for them to move to cheaper rates even if they are eligible for one.
There are an estimated 200,000 mortgage prisoners in the UK, around a third “should” be able to switch as suggested by the Financial Conduct Authority (FCA) but this remains unconfirmed by the regulator.
Prisoners have suffered financially and mentally since the tighter lending terms launched into action. Many have spoken about their misery in previous years, particularly when even more financial hardships occur such as the COVID-19 pandemic and the current Cost of Living crisis.
What does the report outline?
The report outlines just some of the issues that have arisen from the mortgage prisoner crisis, including:
Mortgage Prisoners have been trapped at high rates since 2008, with some rates leaping from 4.5% to as much as 8.29%.
The government has made £2.4bn surplus from the sale of these loans. In 2009, the Government acknowledged that the sale of these mortgages to inactive lenders had the potential to severely harm consumers, but didn’t take action to prevent this.
Prisoners have suffered financially, mentally, and physically for more than a decade. Groups representing mortgage prisoners revealed to MoneySavingExpert that some have even sadly taken their own lives as a result of the devastating situation.
The report is, for the first time, able to include indicative costings the Government requested. Chief Secretary to the Treasury, John Glen MP, committed to reviewing solutions put forward in the LSE report, as long as they met his three criteria: delivering value for money for the Government (not just individuals); fair use of taxpayer spending; and addressing risks of moral hazard (e.g. how to define who should receive financial support relative to other renters and mortgage borrowers).
What solutions are proposed in the report?
Free comprehensive financial advice for all prisoners (required for any borrower who might go on to access other solutions).
Up to 200,000 closed-book borrowers should be contacted individually to access comprehensive and holistic financial advice – not only about mortgages but also debt, benefits and income. The advice would be paid for by the Government and delivered through organisations like Citizens Advice and StepChange. Complex cases could be referred to specialist financial advisers. This advice would be required for borrowers to take up any of the next steps.
Interest-free equity loans to clear the unsecured element of Together loans.
This former Northern Rock product, taken out by many mortgage prisoners, was made up of a mortgage of up to 95% loan-to-value (LTV) and a linked unsecured loan of up to 30% of the value of the property, capped at £30,000. The interest rate on the unsecured element goes up dramatically if the secured element is remortgaged with a new lender – making this a particularly toxic product.
The LSE London report says the secured and unsecured parts of Together loans could be uncoupled by clearing the unsecured element through a second-charge loan provided by the government – removing some barriers to remortgaging, which could free some mortgage prisoners with these loans. This would be interest-free for the first five years, with no requirement for regular payments, and then would bear interest at normal market rates.
Government equity loans on the model of Help to Buy.
Using the established model of Help to Buy loans, the LSE London report proposes that some with more substantial arrears could be helped by similar funding from the government. This would be an equity loan for a maximum of 40% of the value of the property in London and 20% elsewhere, which could be used to pay down the mortgage and other existing debt.
Those with interest-only loans could be moved to part-part loans (where some of the repayment goes against capital). This solution would be interest-free for five years and then attract the same interest as Help to Buy.
This solution would make sure borrowers keep some equity in their homes and they do not incur extra debt. Importantly, it could reduce some mortgage prisoners’ LTVs, helping them to eventually refinance on the open market.
Fallback option: A Government guarantee for active lenders to offer prisoners new mortgages.
This would change lenders’ perceptions and actions for lending to borrowers with higher LTVs. The Government recently introduced a similar, temporary Mortgage Guarantee Scheme to ensure high LTV mortgages continued to be available during the pandemic.
The LSE report says the Government could consider something similar for mortgage prisoners to make borrowers who have done the above steps more attractive to mainstream lenders, releasing them into the open market.
You can view the full report and its proposals in greater detail by going to The London School of Economics and Political Science’s website.
The report’s model looks at cost to the government – using several assumptions – if a realistic minimum of 10 per cent engaged with this process, right up to a target of 70 per cent engagement. It suggests this suite of solutions could cost anywhere between £370m and £2.6bn (net discounted over 10 years).
But the LSE London report adds that with this proposal, the government would still hold stock of second-charge and equity loans at the end of the 10-year period used to calculate the cost – so as these are assets, they can further reduce the net overall cost of the programme to between £50m and £347m.
Barings Law currently represents many clients with various mortgage claims who could be classed as mortgage prisoners. We will continue to stay updated on this and publish any landmark decisions that may arise.
If you have any questions or queries relating to your claim of any type, you can contact us by calling 0161 200 9960 or clicking the webchat option at the bottom of this page.
To take a look at other claim types Barings Law deal with and could help you with, click through to our Claim Types page.