Fears for millions of mortgage prisoners trapped by loans taken out during boom years

  • Half of borrowers, who took out loans between 2005 and 2011, could be stuck in limbo - unable to remortgage or find a better deal
  • New rules could end interest only and self-certified mortgages for millions
  • Borrowers face 'stress test' to ensure they can afford interest rate hikes

Millions of homeowners will become ‘mortgage prisoners’ next year, ‘trapped’ by loans taken out during the boom years, a report warned yesterday.

Controversial new rules, from the Financial Services Authority, Britain’s financial regulator, which will revolutionise the mortgage market, are expected to come into force next summer.

But the report, published by its own consumer panel, warns the rules will ‘potentially exacerbate’ the current lending drought and ‘increase’ the number of so-called ‘mortgage prisoners’.

Mortgage prisoners: Millions of homeowners will become 'trapped' by loans taken out during the boom years, a report warned yesterday

Mortgage prisoners: Millions of homeowners will become 'trapped' by loans taken out during the boom years, a report warned yesterday

This is somebody who is ‘trapped in an existing mortgage’ deal, who faces being refused by all lenders, including their own, when their current deal ends and they need to remortgage.

Typically, they have a small deposit, have an interest-only deal, or are in negative equity, which means their loan is larger than the value of their home.

During the boom years, they were allowed to take out a loan - but will not be allowed to remortgage their current deal when the new rules come into force.

The proposed changes could mean an end to the vast majority of interest only loans, which during the peak of the housing boom accounted for a third of all residential mortgages.

Borrowers hoping for a self-certified loan would also have to meet much stricter conditions, effectively ending that type of mortgage for all but a few people.

Adam Phillips, chairman of the Financial Services Consumer Panel, is concerned how cash-strapped homeowners will cope under the new regime

Adam Phillips, chairman of the Financial Services Consumer Panel, is concerned how cash-strapped homeowners will cope under the new regime

The shake up of rules, aimed at ending the years of reckless borrowing, puts the onus on lenders to be satisfied people can repay loans from income cash flow without a reliance on future property price appreciation.

Lenders must take account of both the borrower’s committed expenditure, which includes the mortgage payments, and basic household expenditure.

Borrowers would also face an interest rate rise 'stress test' to ensure they can cope with hikes.

All these conditions could mean a perfect storm for those who took advantage of the lax lending during the boom.

Some borrowers on an interest only mortgage, stuck in negative equity while struggling with interest rate rises, face being trapped by their debt.

The report, from the Financial Services Consumer Panel, raises fears about how these mortgage prisoners will cope under the new regime and how they will be treated by banks.

It warns: ‘First-time buyer are finding it difficult to get mortgages and existing mortgage holders are finding it difficult to move elsewhere.

‘The proposals [known as the Mortgage Market Review] will potentially exacerbate this situation and increase the number of mortgage ‘prisoners’.

‘In particular, there will be some existing borrowers who will be unable to remortgage to obtain a better deal despite the fact they require no extra borrowing and their personal circumstances have not changed since taking the original mortgage.’

In the FSA’s own assessment, it estimates that ‘nearly half’ of all borrowers who took out a mortgage between 2005 and 2011 could be ‘mortgage prisoners.’

During this six-year period, a total of 10.5million loans to buy a home or to remortgage an existing property were handed out, according to the Council of Mortgage Lenders.

The report warns: ‘We are not convinced that the measures the FSA proposes prevent these types of consumers being charged a higher rate of interest by their lenders, precisely because they are unable to remortgage elsewhere.’

Adam Phillips, chairman of the Financial Services Consumer Panel, said he is ‘extremely concerned’ about how cash-strapped homeowners will cope under the new regime.

He said the new rules must not be introduced unless banks and building societies are forced to treat all mortgage prisoners sympathetically.

Boom years: Between 2005 and 2011 a total of 10.5million loans to buy a home or to remortgage an existing property were handed out, according to the Council of Mortgage Lenders

Boom years: Between 2005 and 2011 a total of 10.5million loans to buy a home or to remortgage an existing property were handed out, according to the Council of Mortgage Lenders

The report says the new rules must ‘prohibit lenders from treating such consumers less favourably than other mortgage customers by reason of the fact that they were trapped.’

It is also calling for the rules to be delayed until Britain’s embattled housing market has ‘demonstrably recovered.’

The FSA expects the new rules to be introduced in 2013, but insists that they will not become law until the housing market is in better, stronger shape.

At present, house prices are falling in most parts of the country and many homeowners, who want to sell their property, cannot find a buyer.

Yesterday an FSA spokesman said: ‘This is a consultation so we are keen to hear the opinions of interested stakeholders.’

It insists transitional arrangements, which will allow lenders to ‘switch off’ the new rules and hand out a loan, will protect ‘mortgage prisoners’.

David Hollingworth, from the independent mortgage advisers, London and Country, said: ‘The big problem is what happens to the homeowners who took out their mortgage at a different time in a different climate.

‘One of the problems is that they will potentially have nowhere to go.’


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