Mortgages Tips

Banks warn mortgage prisoner reforms will still leave thousands trapped paying sky-high rates

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Major mortgage lenders have poured cold water on proposals to help mortgage prisoners, arguing that many homeowners will remain trapped on poor-value deals even after the introduction of new rules.

Telegraph Money understands that banks have raised significant concerns over Government plans to help homeowners who are stuck with expensive mortgage contracts but unable to switch.

Many of these are former Bradford & Bingley and Northern Rock customers whose loans were sold to third parties, dubbed “zombie banks”, in the wake of the financial crisis.

In many cases these homeowners are paying significantly more for their loan than the market rate, but are unable to switch as they would not be able to pass the "affordability tests" rival banks are forced to apply. 

The Government and the City watchdog, the Financial Conduct Authority (FCA), have proposed introducing an exemption, which would allow banks to take on these customers without applying the full tests. But banks say the changes will not assist the vast majority of homeowners trapped.

The FCA itself estimates that of the 500,000 mortgages held by inactive lenders, only between 2,000 and 14,000 would be helped by the new rules.

Privately, banks have warned that even if affordability tests were waived, the vast majority of prisoners would not be able to move lenders because of their age or because they would fail the separate anti-money laundering checks. 

Others, because of their poor financial health, would be offered deals that are little better than the high rates they are already paying.

End of the line?

The industry consultation closed today, with final rules expected to be published at the end of the year. It is then thought that banks would take at least six months to launch mortgages targeting these customers, should they choose to do so.

In their responses to the consultation, leading trade bodies have argued that not enough information is known about customers with inactive lenders, as no industry-wide data is collected.

Jackie Bennett, of UK Finance, said: “We have suggested the FCA collect up-to-date information on closed book customers so lenders can understand their circumstances better and develop products that meet their needs.

“We will continue to work with the FCA and government to consider what more could be done to help customers in closed books who will not qualify for a new mortgage under the new proposed rules.”

Paul Broadhead, of the Building Societies Association, added: “Information about these borrowers’ circumstances remains sketchy and we are therefore working blind.”

The Government’s own role in the mortgage prisoner crisis has come under the spotlight, as it has repeatedly approved the sale of former Bradford & Bingley and Northern Rock loans to zombie banks.

Mr Broadhead called on the Government to ensure that any future sales, including the proposed sale of Tesco Bank’s mortgage book, do not create new mortgage prisoners.

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