The Financial Conduct Authority (FCA) has begun its consultation on relaxing mortgage affordability rules, which could mean thousands of mortgage prisoners are a step closer to freedom.
The FCA’s new proposal suggests that mortgage lenders could choose to carry out a more ‘proportionate’ affordability assessment, for borrowers that are up to date with their mortgage payments and want a better mortgage deal on their current home without additional borrowing.
It’s estimated that 150,000 mortgage prisoners in the UK cannot remortgage because their provider has told them that they cannot afford to; despite making regular mortgage payments and almost certainly remortgaging onto a cheaper rate to reduce their payments.
FCA proposals will address the problems caused by the Mortgage Credit Directive
The Mortgage Credit Directive, an EU rule, means that anyone applying for a mortgage – even if they already have one – are subject to strict affordability checks to scrutinise their income and outgoings. The FCA proposals designed to address the problems this has caused in the UK include:
Relaxing affordability assessment rules
Even if they don’t meet the affordability requirements, eligible borrowers can switch to a new deal if it is more affordable than their existing one. Lenders will not be required to ‘stress test’ these borrowers, which assesses whether the borrowers could cope if interest rates rose by 1% each year for the next five years, and they would also be able to apply these new rules to interest-only mortgage holders.
Inactive and unregulated lenders to contact mortgage prisoners
Approximately 140,000 mortgage prisoners hold a mortgage with unregulated or inactive lenders. The FCA doesn’t govern unregulated lenders, so it’s harder to help their borrowers, and mortgage holders with inactive lenders and unable to remortgage with another provider due to affordability assessments have nowhere to go.
The new rules propose that these lenders contact their residential mortgage customers to let them know that they can switch, if they are on a reversion rate and have kept up to date with payments for the past 12 months.
New lender to be clear about risks when a customer switches
If a customer switches under the new relaxed affordability rules, the new lender must inform them how their mortgage has been judged to be affordable, and advise that the affordability assessment does not take into account early repayment charges and they could end up paying more on a higher reversion rate or in interest if their mortgage term is longer.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “We are particularly concerned about consumers – who are commonly referred to as mortgage prisoners – who are currently unable to switch. That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage.”
The FCA proposals will be consulted on until 26 June.
