Specialist mortgage articles to help you navigate the minefield of getting a mortgage to buy a home or to remortgage your existing home either a residential or a buy to let.

At SAM Conveyancing we give you all the information you need to know and write it in a way that makes it easy to understand. We also have a panel of mortgage brokers to help you find the best mortgage rate in the whole of the market and to complete the paperwork for your mortgage application.

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Switch mortgage for a better deal, particularly mortgage prisoners

05/04/2019
When you switch mortgage, you can potentially save yourself thousands in monthly mortgage repayments over the term of your mortgage although it's understandable that switching something as financially large as a mortgage might be considered a daunting prospect.

Modern business, particularly ecommerce, is particularly slanted towards encouraging people to shop around for better deals once contracts in goods and services come to an end.

A recent Equifax survey revealed only 7% of Brits would be likely to change mortgage provider if they were unhappy with the service. By comparison, they would be far more likely to switch energy provider (41%) or phone company (31%).

This inertia regarding mortgage switching by those who can might even be considered bizarre given that there are more than 100,000 unfortunate mortgage holders who have been, to this point, stuck having to make repayments on a mortgage which they are unable to switch from.

Thinking of switching mortgages? Use our Mortgage Calculator to work out what your repayments etc. might be (click on the calculator below)



This article examines switching mortgage providers, how this can best be achieved while providing some background to the mortgage prisoner situation. 

We consider the following:


Looking to switch mortgage providers?

The Financial Conduct Authority (FCA) estimated in May 2018 that as many as 800,000 mortgagors are paying a high Standard Variable Rate (SVR) and that many of these could switch and save perhaps £1,000 every year.

Our expert independent mortgage brokers can potentially help you locate the right mortgage for you to switch to with a much more favourable rate - and the initial consultation is free.

* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting with mortgage advisor - Terms Apply


    1

    How did the term Mortgage Prisoner come about?

The term ‘mortgage prisoner’ came about after the Financial Conduct Authority’s roll-out of the Mortgage Market Review’s new rules in 2014.

Because of the effects of the credit crunch and financial crash in 2008, the FCA saw the need greatly to tighten up lending requirements and make applications for credit, particularly mortgages and remortgages, that much more stringent.

It took measures to ensure that banks held more reserves just in case of an adverse call on them and additionally to stop lenders offering credit to those representing an unacceptable risk.

These new rules meant lenders put in place strict affordability criteria for potential borrowers. But much trouble has arisen because existing borrowers of mortgages and remortgages, who’d been making their regular monthly repayments, were suddenly faced these new conditions which resulted in them being unable to switch.

This meant that those who’d been on fixed rate mortgages which had expired around that time suddenly found themselves trapped on very expensive mortgages because the interest charged automatically reverted, as is standard to their lender’s Standard Variable Rate (SVR) or reversion rate. This is usually much more expensive than a remortgage deal.


Simple Mortgage Prisoner Example

Let's say you owe £400,000 and still have 20 years to go on your mortgage, and you’re stuck on your lender’s SVR at 4%, your monthly repayments would be a hefty £2,400.

That’s almost £500 more per month than a fixed-rate mortgage with a market-leading interest rate.

SVR mortgages’ interest rates are normally 2% to 5% higher than the interest rate on a market-leading mortgage.

It is thought there are around 150,000 mortgage prisoners stuck on these rates and not allowed to remortgage because they don't meet the strict criteria.

Seemingly to add salt to the wound in the wake of the crash, although for other macroeconomic benefits, the Bank of England dramatically cut its base interest rate to 0.5%, making for some incredibly cheap mortgages for new applicants and even at press time some years later, the base rate has only risen to 0.75%.

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    2

    Are you a Mortgage Prisoner?

You might have become a mortgage prisoner generally if you’ve borrowed money through a mortgage or remortgage but then your circumstances have changed such that you can’t pass the affordability check on a new mortgage.

Let's now look at a more 'real-life' example:

Let's say you took out a 5-year fixed rate mortgage on a property valued at £300,000, with a salary of £40,000 and a deposit of £100,000. You would have been borrowing £200,000 (five times your earnings) with a loan-to-value (LTV) of 66%.

A hypothetical scenario 5 years later might have seen your equity in your property increase to £125,000 – and maybe the property increased in value to £350,000 as well. But if you get made redundant and subsequently land another job but with a lower salary of £30,000, and mortgage lenders implement a stricter lending cap of 4.5 times your salary, you then become a mortgage prisoner. And after those five years are up you’d have to pay your lender’s SVR, making the situation even worse.

Other circumstances can include having a mortgage from a lender which has collapsed and has been sold off to an investor which doesn’t offer mortgage or, for another, a house price fall puts you in negative equity meaning you’re trapped in the sense that you can’t sell or remortgage because you wouldn’t be able to repay or satisfy your lender fully.


    3

    What is the best way to switch mortgage providers?

At the very least and to stimulate your research, you can go online and look at any number of comparison sites dealing with switching mortgages.

This is certainly a preliminary step, however you are well advised to book an appointment with an independent mortgage broker. This is not simply because they can sift through tens of 1,000s of mortgage products to find the right one for your circumstances.

The FCA has become increasingly aware of the plight of mortgage prisoners and has encouraged lenders to relax affordability checks on mortgage prisoners if they apply to switch to better deals, as long as they've kept up their repayments.

An expert independent mortgage broker is much more likely to be aware of lenders who will consider offering such a switch. In August 2018, a group of 59 authorised lenders who accounted for 93% of the UK residential mortgage market agreed to help up to 10,000 mortgage prisoners who have mortgages with authorised lenders.

The broker will also be aware of expected eligibility conditions, thus saving you from a failed application. These conditions can include, for example:
  • you have to be a first charge owner-occupier
  • you have to be on a reversion rate (SVR)
  • you must be looking for a 'like-for-like' mortgage

    4

    When should you switch mortgage providers?

From a debt perspective, you should switch out of a costly SVR mortgage as soon as possible. For those on a fixed rate, you must wait until the fixed period expires in the normal way, otherwise you'll face hefty early repayment charges.

Brexit

Advice from many commentators is mixed regarding how Brexit may or may not affect these matters. Some experts suggest that getting a new fixed rate is the best insurance against the current uncertainty, however you should always be looking to stay put with a fix - if you're likely to want to move sooner rather than later, once again you have to consider early repayment charges.


    5

    What other alternatives are there to switching?

You might consider any or all of the following:
  • Overpay your mortgage - this will lower what you have to pay in interest overall on the mortgage and you'll pay it off more quickly (however please note that, depending on your individual mortgage conditions, you might only be able to overpay up to a certain amount).
  • Increase your salary - obvious yes, but you'll always be offered more favourable terms when it comes to mortgaging and remortgaging.
  • Downsize - if you can tolerate this, you can reduce your mortgage payments or even remove them entirely.

Looking to switch mortgage providers?

The Financial Conduct Authority (FCA) estimated in May 2018 that as many as 800,000 mortgagors are paying a high Standard Variable Rate (SVR) and that many of these could switch and save perhaps £1,000 every year.

Our expert independent mortgage brokers can potentially help you locate the right mortgage for you to switch to with a much more favourable rate - and the initial consultation is free.

* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting with mortgage advisor - Terms Apply

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