Around 250,000 borrowers are currently classified as ‘mortgage prisoners’ in the UK.
Individual circumstances vary, but the bottom line is that these borrowers are unable to remortgage or get better mortgage deals, either because of equity or affordability problems, or because their provider doesn’t have any suitable new or cheaper deals to offer them.
As a result, some of these borrowers are paying rates in excess of 5%, compared to the Bank of England base rate of 0.1%
On 27 April this year, MPs voted against an amendment to the Financial Services Bill that would have introduced an SVR cap for mortgage prisoners – a blow to those who had been hoping for legislative action to address this issue.
However, there may be a market-based solution available to some of these borrowers. In a speech to parliament, Treasury economic secretary John Glen, reiterated that analysis by the FCA showed that around 125,000 (or half) of the UK’s mortgage prisoners were classified as so purely because their current lender is ‘inactive’ and doesn’t have any suitable new products for them to move onto. Despite this, these people could meet the normal risk appetite of lenders and so could switch providers without intervention, freeing them from ‘prisoner’ status.
For these people, open banking could be the key to getting them these better deals.
The power of data
Open banking technology may still be in its infancy, but it is already providing new ways to access personal finance data, allowing for a deeper and more holistic understanding of a borrower’s financial circumstances. As a result, widespread adoption of open banking has the potential to bring real benefits to the mortgage industry, and to mortgage prisoners in particular.
For a start, open banking can make it much easier for brokers to find the most appropriate products for complex borrowers (a category into which many mortgage prisoners fall), since it uses sophisticated APIs (application programming interfaces) to share financial data across different institutions.
When used in conjunction with automated income verification systems (AIVs), this technology can also help to speed up the lending decision process considerably.
Because AIVs verify the information held on printed documents and convert it into a digital format, thousands of documents can be processed every week. This can cut down processing times for lenders significantly, allowing them to service more borrowers more quickly or divert resources to work on better solutions for borrowers who require a non-standard approach.
Advisers can then use this information to get a clearer picture of which products and lenders are suitable for their client before they make an application. This way, advisers can protect anyone with affordability problems from suffering further damage to their credit if their application is rejected.
Increased efficiency
Alongside these benefits, open banking is increasingly being employed to reduce the manual input required for the mortgage application process, resulting in significant time savings and reduced human error. As a result, advisers can redirect their time towards finding the right products for their customers, including former mortgage prisoners.
This increased efficiency may also reduce costs, as well as allowing brokers to pursue new business leads sparked by the recent boom in housing demand. If the industry can make use of this tech to improve its profitability, then it can also leverage these advances to keep rates low for cash-poor borrowers and invest more in dealing with complex edge cases, such as mortgage prisoners.
Although there is more that needs to be done to address the issue of mortgage prisoners in legislation and policy, technology can be a lifeline in helping advisers to secure a better deal for their customers.
Open banking has the unique ability to identify a range of lending and product solutions to suit a variety of situations. This will be vital in allowing mortgage prisoners, and borrowers with complicated financial situations, to secure a deal suited to their needs.
