By Daniel Hall
11th May 2017
 

The term “mortgage prisoner” has been banded around for a couple of years now, but it could soon start taking on a much more significant meaning.

A “mortgage prisoner” is a term used to describe someone who is trapped into paying a high interest rate on their mortgage, typically their mortgage lenders’ Standard Variable Rate (SVR). The prisoner may have been on a fixed rate deal in the past, but when trying to remortgage or switch mortgage deals, they are told by their lender that they don’t qualify for the lower fixed rate and so are put into the much higher default SVR.

As can be seen from the examples below, there is a clear difference between some lenders current fixed rate deals and their standard variable rates. Clearly if you are paying your lenders’ SVR, and you don’t need to be, then you are potentially overpaying thousands of pounds on your mortgage each year.

SVR Fixed Rate
Halifax 3.74% 2.04%*
Santander 4.49% 1.19%**

The perverse logic of the mortgage prisoner

So how does someone become a mortgage prisoner?

When you apply to remortgage or switch deals, you need to make an application to your mortgage provider. As part of their application process they will look into several factors such as: calculating the level of your income and expenditure each month, seeing whether there have been any arrears on your mortgage payments and asking you to undertake an “Affordability Assessment”. Each mortgage provider’s Affordability Assessment is a bit of a black box in decision making, but it may well be the case that you hear the words….ʺthe computer says NO”!

When the computer says “No”, this means that your mortgage lender is telling you that you can’t actually afford to make the monthly payments on a low fixed rate mortgage deal that you have just applied for. There solution is to insist that you pay their higher Standard Variable Rate.
Driven by greater profits

There is of course a perversion of logic in this mechanism, whereby those individuals least likely to afford their monthly mortgage payments are penalised by being put on a higher rate of interest. Of course your mortgage lender may defend this course of action by insisting that they should be rewarded a higher return for the extra risk of providing loans to someone who has failed an Affordability Assessment (similar logic to the Pay Day Loan industry), but there is also a requirement for the lender to treat their customers fairly and act in their best interests. It may be the case that by probing deeper into the black box, the real reason behind the outcomes of many decisions is actually a commercial driver – the higher the interest charged, the greater the profits for the lender.

So why are mortgage prisoners now in the spot light?

If you are a mortgage prisoner, it may be that you no longer need to suffer in silence or accept what your mortgage lender has told you if you have tried to complain.

A recent decision by the Financial Ombudsman Service (FOS) makes it clear that mortgage lenders have to act in your best interests when assessing an application to remortgage or switch. By acting in your best interests, your mortgage provider should provide you with access to the best market rates for your own individual circumstances. They can no longer hide behind the Affordability Test rejection outcome – if they try to do this, then you should go to the FOS. Chirantan Barua, a banking analyst at Bernstein, said:“After this ruling, anyone who’s on a rate approaching 4pc is going to run to the bank and ask for a repricing.”

Get me out of here

So if you believe that you are a mortgage prisoner and are overpaying on your mortgage, here is a short checklist of the some of the things you should be thinking about.

Mortgage Prisoner Checklist

  1. Have you applied to your mortgage lender to remortgage or switch your mortgage to a better deal?
  2. If your application was rejected, have you asked your mortgage lender why this was?
  3. Have you requested a Subject Access Request from your mortgage provider to try to understand their decision?
  4. Have you made an official complaint (ideally in writing) to your mortgage lender outlining the reasons why you think their decisions was unfair?
  5. If the complaint has not been resolved to your satisfaction, have you taken your case to the Financial Ombudsman Service? (remember you will need to do this within 6 months of receiving the ‘Final Response Letter’ from your mortgage provider)