Plans to help “mortgage prisoners” who are trapped into paying higher rates on their home have been outlined by the City regulator.
The Financial Conduct Authority (FCA) said it is looking at how barriers may be removed to help them – and will publish a consultation paper this spring.
Some mortgage customers have difficulty switching because they took out a loan before stricter lending rules were introduced after the financial crisis.
Andrew Bailey, chief executive of the FCA, has written to Nicky Morgan, chair of the Treasury Committee, to provide an update on the regulator’s work on the issue.
In his letter, Mr Bailey said the “key issue” for customers of inactive lenders and unregulated firms was that their mortgages are with lenders that do not or cannot offer them a new loan.
He said: “In our view, the solution for such customers is therefore a switch to an active lender, with whom they may be able to get a better deal.
“We want to remove potential barriers in our rules to those customers switching to a cheaper mortgage.
“To help these customers, we will consult on changes in our responsible lending rules, with the aim to deliver a more proportionate affordability assessment.”
Ms Morgan said: “Under pressure from the committee, the FCA has worked with industry and established a voluntary agreement, which allows most of the 10,000 mortgage prisoners of active lenders to switch to a better deal.
“Whilst help for these customers is a welcome step, there remain 120,000 mortgage prisoners with unregulated firms, and 20,000 with regulated but inactive firms.
Interest rate trap
“These customers are trapped on a far higher interest rate than is necessary through no fault of their own.”
She continued: “The regulator must now act swiftly to help these 140,000 mortgage prisoners, and not use this consultation to kick the issue into the long grass.”
The FCA’s new proposals, around lenders’ affordability assessments, could help customers who are looking for a cheaper mortgage deal.
However, not all will benefit. Those in arrears, negative equity or with other considerable debts are likely to struggle to find another lender.
The proposed approach could potentially mean that affordability assessments would be based around whether borrowers’ new mortgage costs are more affordable than their current mortgage costs.
Mr Bailey said: “Our focus will be on those customers who are seeking to move to a cheaper mortgage and are not borrowing more to ensure that a new mortgage is more affordable for these customers.
“There also needs to be a willingness from industry to offer re-mortgaging opportunities to these customers once the regulatory barriers are removed.”
Participation will be up to individual firms, and not all will have the risk appetite, he said.
Jackie Bennett, director of mortgages at UK Finance, said: “It is a positive step that the FCA has set out the action it will take to help those customers stuck on reversion rates who are with inactive or unregulated lenders.
“But it has also recognised that regulatory changes are needed to remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders.”
She added: “We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily.”
