What is a mortgage prisoner?

A mortgage prisoner is someone who is stuck with a mortgage that they can’t get out of by remortgaging (switching to another mortgage or another lender), or who has an interest-only deal and no way of paying back the loan.

The longer you are trapped with a mortgage, the more likely it is you’ll have been moved onto the lender’s standard variable rate – an interest rate that is much higher than you’d be able to get with a new deal. This means that mortgage prisoners are often paying thousands of pounds more than they should be every year.

There are thought to be more than 150,000 mortgage prisoners in the UK, many of whom could be at risk of losing their homes.

Getting a mortgage, ‘Together’

The deal Helen and Greg took out from Northern Rock was called a ‘Together’ loan. It included a £30,000 unsecured loan on top of a mortgage for 95% of the property’s value.

Greg says the loan was mostly put towards his pilot training. ‘It’s very expensive to become an airline pilot,’ he told us.

‘They’d lend you 125% of the property value, but £30,000 of it was an unsecured loan, not part of the mortgage.’

This would be unheard of in today’s market, where even 100% mortgages are few and far between – but things were very different before the 2008 financial crash.

The terms of Helen and Greg’s mortgage meant that the interest rate on the loan would skyrocket if they remortgaged to another lender. So when Northern Rock asked Greg over the phone if he was happy with his mortgage one year on, he didn’t consider leaving them.

Little did he know, that phone call would seal his fate for the next two decades.

Greg and the Northern Rock agent discussed the idea of him switching from a repayment mortgage, which involves paying off part of the mortgage itself each month as well as interest, to an interest-only mortgage, where the loan doesn’t get paid off along the way.

‘The basis on which it was discussed was along the lines of, “Well look, property values are going up all the time” – because at the time they were, this was before the housing crash – “so actually, although you’re not paying off the capital straight away, your house value’s still climbing, so you’re still building equity in the property”.’

Switching to an interest-only mortgage would reduce Greg’s monthly payments. Greg and the agent discussed how he could use the extra money to pay off other debts – perhaps the unsecured loan.

If Greg’s property had continued to grow in value, he would have been able to sell it to pay off the mortgage when his term ended in 2030. But it didn’t work out that way.

‘The market crashed and the value of the property decreased significantly,’ says Greg. ‘And it hasn’t changed an awful lot between then and now.’

Greg and Helen’s property was valued at £135,000 when they bought it in 2007. When they got it valued in April this year, it was worth £120,000. So even if they did sell the property in 10 years’ time, they would still owe £15,000 to NRAM, the current owner of their mortgage (more on this below).

This means they are in negative equity, meaning they owe more to the mortgage company than their home is actually worth.

What happened to Northern Rock’s mortgages after it collapsed?

NRAM (Northern Rock Asset Management) has a complicated history, but in short it was formed from the remains of Northern Rock after the bank was nationalised in 2008.

NRAM now handles the ‘bad’ loans that were on Northern Rock’s book, while many of the ‘good’ loans have been sold to Virgin Money.

‘In the letter that came through, they actually called them ‘good’ and ‘bad’ mortgages,’ says Greg. ‘I remember reading it at the time thinking, “Oh, thank you very much!” I don’t have a copy of that letter anymore but I certainly remember reading it.’

‘Zombie’ lenders

NRAM is not an active mortgage lender. It is licensed to handle the mortgages it already has on its books, but it can’t give new mortgages or make changes to customers’ current terms.

It’s what’s known as a ‘zombie lender’, and this is at the heart of Greg’s problems.

Approximately every two years, someone from NRAM calls Greg.

They ask him – Greg paraphrases – ‘Are you aware that repayment isn’t being made, as your mortgage is interest-only?’

Every time, Greg tells them that he is aware. He also asks if he can switch his mortgage from interest-only to repayment over a new, longer term, thereby allowing him to slowly pay off the balance.

The answer, invariably, is no.

An industry-wide issue?

‘I’ve never had an issue with affordability, ever. That’s never been the case,’ Greg says. And in fact, a new repayment mortgage could be cheaper than the current interest alone, if Greg was given a better rate.

But NRAM informs Greg that it cannot change the terms of his mortgage because it doesn’t have a lending licence.

If he were to switch to a repayment mortgage with a new 25-year term and an interest rate much lower than his current 5.03%, Greg says, ‘The repayment could be the same, except the balance would be getting paid off. The house would actually be getting paid off rather than being a ticking time bomb in 10 years’ time.’

A spokesperson for UKAR (NRAM’s holding company) said: ‘We understand that some customers may have limited options, particularly due to tightening of criteria post the implementation of the Mortgage Market Review and Mortgage Credit Directive, but this is an industry-wide issue, not specific to NRAM.

‘We understand it can be difficult and stressful for customers who find themselves in this situation and we welcome the FCA’s efforts to explore ways of helping customers who may be unable to switch products.’

The Mortgage Market Review and Mortgage Credit Directive were, in short, efforts to change the system to avoid another market crash. The stricter affordability checks they introduced had the consequence of restricting some people’s ability to remortgage.

The FCA is the financial regulator, and it is exploring further market reforms.

Defusing the mortgage ‘time bomb’

In a situation like this, the obvious solution would usually be to remortgage to a new lender. But Greg and Helen can’t do that because of being in negative equity.

Another option might be to sell the property – but if Greg and Helen did that they wouldn’t get enough to pay off the mortgage.

So when their family grew too big for the small three-bed property (‘Bedroom number three is a box room, it’s tiny,’ says Greg), they had a problem.

‘We were running out of space. It was very difficult because we were genuinely stuck in this house. We wanted to move for years, and we couldn’t get out.

‘We couldn’t sell it or get a new mortgage because we’re in negative equity.’

In 2015, the couple decided to let the house to tenants, using the rental income to cover the mortgage interest payments, and buy a larger home with a new mortgage from Barclays.

Greg has also paid off his original £30,000 unsecured loan by taking out another loan from Barclays.

‘I’m an “accidental landlord”. It’s not a business for me, it’s not something I want to do. It’s something I had to do because I can’t sell the house, because it’s not worth as much as the mortgage.

‘I needed to move on because I’ve got a growing family. We couldn’t stay there forever.’

Greg knows he was fortunate to have been able to do this. If he earned less, he would have found it harder to get a mortgage on a new property.

‘If I still lived there, I’d be worried that in 10 years’ time, if I couldn’t pay the mortgage off, I’d risk losing my home. I’m concerned for the people who are in this situation.’

‘It’s a mortgage trap’

As well as becoming a landlord, Greg has built up a huge amount of knowledge during his time as a mortgage prisoner. Over the course of two interviews with Which?, it was clear that he had put considerable effort into coming up with potential solutions and workarounds for his situation.

In spite of a looming £135,000 bill, Greg sounds level-headed. ‘It’s the job I’m in,’ he says. ‘If you’re flying a plane and worrying about your mortgage in the background, that’s not a good recipe.

‘It’ll get to a point where the mortgage company is gonna say, “Right, there you go. There’s your mortgage. Now you owe us £135,000.” And I haven’t got that. That worry’s always there.

‘It is a trap, it’s a mortgage trap. And there’s no way out.’

Is there help for mortgage prisoners?

Greg and Helen’s situation may sound unusual, but tens of thousands of people are trapped in mortgages that are costing them thousands more than they should be paying, and from which they can’t escape.

The FCA announced changes to its regulations earlier in the year, with the intention of helping mortgage prisoners remortgage. But some say these proposals don’t go far enough.

The All-Party Parliamentary Group on Mortgage Prisoners was set up in June to examine the FCA’s regulations, and investigate whether more could be done to fix this epidemic.

Loosening affordability requirements is one suggestion. This would allow those who were given mortgages under the old, pre-crash lending rules, but who are deemed ineligible for a mortgage under the new, stricter regulations, to remortgage to cheaper deals.

If you have an interest-only mortgage that you don’t know how you’ll pay off, read our interest-only mortgages guide.

You can also sign up to the Which? Money newsletter to keep up to date with developments on help for mortgage prisoners.

Read more of our mortgage prisoners coverage here:

_{*Names have been changed to protect identities.}