SPECIAL FEATURE: The six categories of mortgage prisoner
Remortgages still haven’t taken off in the way many of us would have imagined when you look at the rates that are currently available. They still only account for c30% of transactions compared to 62% for the same month in 2008 according to BBA figures. Most people put this down to apathy while rates are so low and they expect the remortgage numbers to rise when base rate looks likely to increase. However we may never actually get that surge; this is because too many people are now mortgage prisoners, trapped because they can no longer move house or remortgage.
I think there are six categories of mortgage prisoner although there are probably more.
Traditional mortgage prisoners
Traditional mortgage prisoners bought at the height of the market when house prices were booming. While we have seen significant house price inflation in the south of the country, there are those, especially in the North East where house prices fell and have then been static for years. People there can no longer move or remortgage either because the sale of the house won’t cover the mortgage or they just cannot make the loan to value ratios.
These mortgage prisoners fall into two categories now: those fortunate to be on very low SVRs and others who are being hit by some of the highest rates in the market who now cannot escape.
Mortgages that extend into retirement
With the current apprehension on lending into retirement, many older people are also trapped unable to remortgage unless they can afford to shorten their mortgage term. This is unaffordable for many especially for those closer to retirement. This blanket maximum age rule that some lenders have adopted is nonsensical in many circumstances, especially where older people will continue working into retirement or have a sizeable pension pot more than large enough to continue mortgage payments.
Borrowers on interest only mortgages are one of the unintended categories of people to be hit by the MMR. While it makes sense for all but those who have an additional source of money to have a repayment vehicle in place, an aversion to the risks presented by people taking out an interest only mortgage has meant that these are now scarce. This does mean that those already on interest only need to be able to afford to switch to a repayment mortgage in the majority of cases. Those who can’t afford to do this may find themselves trapped on the same rate until their mortgage reaches its completion date.
Many people who originally took out a self cert mortgage have found that they cannot remortgage because no-one will lend to them. Many people self certifying did so because they could include income from multiple sources, which they now cannot do in many cases, while other borrowers overstated their income. Now I am not advocating a return to these mortgages, far from it, in their purest form this was equity lending. However income tests are so rigorous it is impossible for many former self-certers to remortgage as they just cannot meet the income requirements for a mortgage of the size they need. Perversely business owners are finding their employees on PAYE can get mortgages whilst they are shut out of the market.
There is also a group of people that have become self employed since they took out their last mortgage. While there are some lenders who will now accept just one year’s accounts, there are many more which still require two to three years accounts. People who cannot produce these or who now do not earn as much as they once did, find themselves unable to refinance their home, even if they would be better off as a result.
Asset Rich/Income poor
Clients with substantial assets have probably been the hardest hit by the MMR rules, even large liquid savings for instance such as school fees pot cannot be taken into consideration when assessing income against expenditure. The affordability and proof of income rules which form the pillar of the MMR are driving this type of business in the short term lending market such as bridging.
The final category of mortgage prisoner is those whose circumstances have changed since they first took out their mortgage, they may be divorced, have lost their job or had some other change of circumstance which means their family income has dropped and so they suddenly find that they can no longer qualify for a new mortgage.
All of these mortgage prisoners, especially those on high SVRs could be helped if the FCAs transitional rules were applied. Lenders only have until 26th March to apply the current transitional arrangements as these will no longer be possible under the Mortgage Credit Directive. However post implementation lenders will be required to test affordability and prove income. They do of course have the option of using different metrics to calculate loan sizes, and why not if the borrowers prove a good track record with their existing lender.
Long term it also highlights the importance of looking at the lifetime rate of a mortgage rather than just the upfront rate, as post MMR, there is no guarantee that your client will indeed be able to remortgage in two or five years time.