The government must do something to help unlock 250,000 people trapped in unaffordable mortgages, concludes research commissioned by MoneySavingExpert.com.

This research was undertaken by housing experts from the London School of Economics and Political Science and highlights the urgent need to help mortgage prisoners before coronavirus tips some of them over the edge.

Mental health and debt problems

The LSE’s report found mortgage prisoners in closed books could be almost 40% more likely to default on mortgage payments than the average borrower.

Many mortgage prisoners pay interest rates that are far higher than the market average and are unable to remortgage. This leads to higher rates of physical and mental health issues as well as general debt problems and arrears.

FCA at the end of the road

The Financial Conduct Authority has adopted policies to make sure mortgage prisoners are treated fairly where possible, yet the solutions it can put in place will only help a small minority.

According to the report, the regulator has gone as far as it can within its current powers, including relaxing affordability rules. But take-up of its measures by lenders has been slow especially in light of coronavirus.

Government can free mortgage prisoners

The LSE report concludes that only the government can free mortgage prisoners as the problem was largely created by the policies of successive governments.

Before the global financial crisis, mortgage prisoners entered into loans with reputable, mainstream lenders that subsequently failed such as Northern Rock. Many of their mortgages were taken into government ownership and moved to UK Asset Resolution, a company specifically set up to service these loans.

The report says that prioritising financial profit over consumer protection, UKAR sold a large proportion of mortgage prisoner loans to firms that are not mortgage lenders; and therefore not able to offer them cheaper products.

Proposals

LSE has put forward eight potential solutions to free mortgage prisoners and urges the government to assess the full costs and benefits of these proposals. These include:

• Interest-free government equity loans which will bring down some mortgage prisoners’ loan-to-value ratios so they can remortgage – similar to the Help to Buy scheme.
• Remove ‘Together’ loans as an obstacle – The former Northern Rock’s Together mortgage consisted of a secured loan and an unsecured loan taking the product up to a maximum of 125 per cent LTV. Mortgage prisoners with Together loans can only remortgage with an authorised lender if the unsecured debt is de-linked, and they pass affordability checks for a new mortgage.
• Mortgage rescue would allow those whose mortgages are financially unsustainable to remain in their homes as tenants, while the property is sold to housing associations with a buy-back option later.
• Bringing all owners of ‘closed books’ within the FCA’s oversight – similar to measures in Ireland.

The LSE also suggests that mortgage prisoners are provided with information about their options and are better signposted to debt counselling and advice.

Founder of MoneySavingExpert.com Martin Lewis, who funded the LSE research, says: “Mortgage prisoners are the forgotten victims of the 2008 financial crash.

“The government at the time chose to bail out the banks, but unfairly – immorally – hundreds of thousands of their victims were left without adequate help, trapped in their mortgages and the financial misery caused by it. And they have been forgotten ever since.”

Distinguished policy fellow at LSE London Kath Scanlon comments: “The government took measures after the global financial crisis to make mortgage lending less risky, but these policies also contributed to locking some borrowers into their existing lenders.

“Our research aimed to understand the range of circumstances facing mortgage prisoners and identify solutions so more of them can reduce their payments and/or restructure their mortgage arrangements and keep their home. We hope our work contributes to a long-lasting solution for these borrowers.”