Mortgage prisoners offered escape route

The introduction of the Mortgage Market Review on 26 April 2014 was designed to ensure all mortgage lending was truly affordable for borrowers. 

But this new set of rules on affordability is now making it difficult for some homeowners to re-mortgage their current property or to port their mortgage to move to a new home. 

The self-employed, older borrowers and those with incomes below the national average, for example, could potentially struggle to meet the new requirements, as the infographic below shows.

mortgage misfitEven worse, some of those affected by the significant change in regulation regarding home loans have become mortgage prisoners, trapped on their lender’s standard variable rate at often a higher rate and unable to access a new mortgage deal.

This is because they have failed to meet the new affordability requirements and their lender has chosen not to offer them a new mortgage product.

But there is a way out of this situation. The new rules on affordability include something called transitional arrangements. Mortgage holders who have always paid their mortgage on time can be considered by lenders under transitional arrangements as long as they do not wish to increase their mortgage and have held the home loan since before 26 April 2014.

Why aren’t lenders looking after mortgage prisoners?

Often the lender may be using automated processes that limit their ability to review applications on an individual basis and to use transitional arrangements. Smaller lenders who use manual underwriting (human beings) to consider mortgage applications rather than computers are able to consider each case on an individual basis. More often it is smaller building societies rather than banks that use this personal approach.

A number of lenders will use transitional arrangements for their existing borrowers but very few will offer these to other borrowers. Ipswich Building Society recently announced it would accept transitional cases from borrowers, even if they had been turned down by their existing lender.

What can mortgage prisoners do?

Mortgage prisoners who feel that they have no option other than stay on the existing lender’s standard variable rate should speak with their existing lender and ask them about the availability of transitional arrangements.

They should also talk with other lenders to find out if they can use their transitional arrangements. This could open up increased choice and help the mortgage prisoner find a mortgage that is right for them.

While all lenders have to adhere to the new affordability rules, they all have their own individual approach to the criteria under which they will lend, including the use of transitional arrangements.