'Mortgage Prisoners': FCA Proposes A Regulatory Key To The Cell Door

One of the key areas for improvement identified by the FCA in its Mortgages Market Study final report is to make it easier for so-called 'mortgage prisoners' - longstanding borrowers on relatively high reversion rates (the interest rate that applies once any introductory rate ends) - to switch to new deals. It is therefore proposing changes to its responsible lending rules and guidance to introduce a modified affordability assessment for eligible consumers. Where lenders choose to take advantage of the new regime, many of the changes will mean a relaxation of the current affordability requirements to help set 'mortgage prisoners' free.

What's the background?

The FCA believes that post-financial crisis changes in regulatory requirements for affordability assessments and in lending practices left some consumers on relatively high reversion rates when their introductory deals came to an end. These 'mortgage prisoners' have been unable to switch to cheaper mortgages despite being up-to-date with their payments. Most 'mortgage prisoners' are with firms that are inactive and/or not authorised to lend.

A voluntary industry agreement among active lenders has already been introduced

Over 65 active lenders (around 95% of the market) have signed up to a voluntary industry agreement to help existing customers who previously didn't qualify for a switch to find a better deal via an internal switch, providing they meet certain minimum criteria. Lenders have already contacted qualifying customers to offer a switch to a better interest rate. The FCA will monitor what proportion of 'mortgage prisoners' have mortgages with the 5% of active lenders that have not yet signed up and keep the effectiveness of the agreement under review.

Proposed changes to the FCA's responsible lending rules and guidance in MCOB will tackle the more complex issue of 'mortgage prisoners' with inactive firms

For 'mortgage prisoners' with inactive firms who are not looking to borrow more, the FCA is proposing changes to its current responsible lending rules and guidance to remove regulatory barriers for lenders who might be willing to lend to these customers. The existing affordability assessment will be retained, but lenders can choose to carry out a modified assessment for these customers, provided that they can demonstrate the new mortgage is more affordable than the customer's present one.

Who will be eligible?

The FCA proposes that eligible consumers must meet all of these...