Borrowers who have been ‘trapped’ into a mortgage with their existing lender, have been in the news again recently.
This follows the publication of the Mortgage Market Review final rules and the immediate steps that are now being taken take to protect these customers, known as ‘mortgage prisoners’.
The MMR also seeks to use transitional arrangements to help maintain and increase the options available for such customers – although the extent to which this will have an impact is still to be seen.
While the MMR is seeking to help these customers, the Government and European Union are consulting on prudential controls, including LTV limits, that could make help even harder in the future.
The perennial challenge facing regulators is to prevent any excessive risk taking while at the same time providing a safety net for borrowers in difficulty.
Some mortgage prisoners will undoubtedly continue to be trapped by their circumstances, but there are options available to many of them.
For example, at Nationwide, we allow good quality existing customers to move house where they have a good payment history and a sound reason for moving. This is the case even if they are in negative equity, and need to borrow more money.
Of course not all mortgage prisoners are unable to move. Some borrowers are so-called ‘prisoners’ by choice, having obtained access to mortgage rates that are no longer available to new customers.
But those who opted for a repayment mortgage – or those on interest-only mortgages who continued with their payments at the same level when rates fell – are now beginning to see the significant benefits of their strategy.
A typical repayment customer who bought at the peak of the market with an 80 per cent loan-to-value repayment would have seen their mortgage balance reduce by around 12.5 per cent. Offsetting this change is the reduction in LTVs.
There are regional variations here but typically that customer would now have an LTV below 80% whilst the interest only customer’s LTV would be over 90%.
This will have a significant impact on the choice and cost of mortgages available and whether that customer is in fact a mortgage prisoner, unless through choice of course.
With house prices expected to remain largely unchanged, this difference between these customer groups will continue to grow.
There is some regional variation. In London where house prices have largely recovered, interest-only customers will still have options, while in Northern Ireland even a repayment mortgage may not help keep a borrower out of negative equity.
But overall those that have been able to continue strategies to repay their mortgages are being rewarded with the choice and rates on offer.
Competition at higher LTV levels is gradually increasing, but the gap between the various LTV rates continues to be substantial.
It means that for many customers, regularly paying off their mortgage can – over time – lead to a large saving on their loan rate.
For some it will be the difference between being a prisoner and a free man or woman