I’m a mortgage prisoner struggling to keep up with rising interest rates – what should I do?

You asked:

I’m a mortgage prisoner. I’ve been stuck on my bank’s variable rate for more than a decade because we’re unable to fix. With interest rates rising seven times in a row, on top of inflation, I’m very worried about how I’m going to cope financially over the next few months. What should I do?

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Our reply:

For those of you unfamiliar with the term “mortgage prisoners”, these are homeowners who are stuck on their lender’s standard variable rate (SVR) – typically the most expensive type of mortgage on the market. 

The vast majority of those affected had bought their homes around a decade ago before stricter affordability rules were introduced by mortgage lenders in 2014 following the last financial crisis.

When this happened, these homeowners no longer passed the new lending checks – which demanded not just information on earnings but a more detailed assessment of a borrower’s finances, including regular outgoings such as subscriptions and other loans, and a repayment plan where the homeowner was on an interest-only mortgage.

Some borrowers became “closed book” customers. That meant they were stuck with a lender that either went defunct during the 2008 crash, no longer sold mortgages or their loan had been sold to a non-lender. These companies don’t let customers switch or take out more suitable mortgage deals, leaving them trapped. Homeowners on these home loans are likely to be paying even more than a typical SVR.

A large amount of borrowers also ended up stuck on interest-only mortgages, which as the name suggests, mean that they only repay the interest they owe each month rather than any of the capital – which must be repaid at the end of the mortgage term. Previously, these borrowers did not have to show clear evidence of how they were going to repay the capital. But tighter lending rules mean this evidence is now required in order to remortgage.

The most recent government figures show there are just under 200,000 mortgage prisoners in the UK.

Like you, they are struggling to keep up with base rate increases. Interest rates on variable deals have risen seven times since last December after hitting a record low during the pandemic.

It has prompted a fresh cry for help.

Rachel Neale, lead campaigner of the UK Mortgage Prisoners charity, issued a plea to MPs last week. Amid concerns about sharp increases in fixed deals, she pointed to the fact that mortgage prisoners have been paying rates of between 4% and 9% for more than a decade.

For years the charity has campaigned that 5% rates were unsustainable while everybody else was on 1% and 2% mortgages. Neale warned that mortgage prisoners are probably going to end up spending 9% or more because they will get the same increase.

“Ironically, we’ve got some people who’ve escaped and got onto two-year fixed deals, who are now going to end up going back on high rates again,” she said.

Some mortgage prisoners believe they will see bills increase by £400 to £1,000 a month.

If people can’t afford the repayments then their homes could end up being repossessed and they could even end up homeless. 

“Or it’s other things failing, people not feeding themselves or certainly not using heating,” said Neale. “We’ve had people asking for food vouchers or if we can pay part of their electricity bill.”

So what are the options for mortgage prisoners?

The Financial Conduct Authority has been dipping in and out of the mortgage prisoner crisis for years, but not a lot has been done about it. 

You may have some options to explore though. I’ve broken these down below.

1. Switch to another lender owned by the same company

At the start of the pandemic in 2020, the FCA brought in new rules that said if you’re a mortgage prisoner with an inactive lender, you can now ask to switch to a cheaper deal with any lender that is part of the same financial group as that bank or building society. 

But this is at the company’s discretion, so help isn’t guaranteed. It does offer some hope though as if another bank in the same group offers a better deal, you will be able to access it.

A broker would be able to help you with this. MoneyHelper has a list of brokers who offer specialist support to mortgage prisoners. A tool like who owns my bank would be able to tell you who owns what.

If you’re on an interest-only mortgage, in order to switch, most lenders will want to see a repayment plan that proves you will be able to pay the outstanding mortgage at the end of your term. This is of course tricky.

Some lenders might be able to offer options that include switching part of your mortgage to repayment (capital and interest). This will increase your monthly payments but leave you in a better position to repay your mortgage later or by arranging to make overpayments to reduce the overall debt, which could make it easier to remortgage in the future.

If the value of your home has gone down since you purchased it, you could be in negative equity. For example, if you bought a property for £150,000, with a mortgage for £120,000 and the property is now worth £100,000, you now owe the bank more than it’s currently worth.

If you’re in negative equity, unless you have savings that you can use to repay the difference between the value of your home and the mortgage, you might find it difficult to switch to another deal.

It’s worth speaking to a broker about negative equity mortgages instead. These loans let you carry your debt with you, but the interest rates are usually high – so switching could be futile.

If you’re in negative equity here are your options.

2. You may qualify for a relaxed affordability test

In 2019, lenders were given the powers to relax affordability checks for applicants who are particularly at a disadvantage, allowing them to get a cheaper mortgage. 

Instead of the usual affordability check, they can do what’s known as a “modified affordability assessment” instead. Again this isn’t mandatory so entirely at their discretion. It’s also decided on a case-by-case basis.

If successful, it means you will be able to switch to a new lender. Providing you’re:

• Not in negative equity
• Have £50,000 or more left on your mortgage and a minimum of five years
• Have not missed a mortgage payment in the last 12 months. This doesn’t include Covid-payment holidays.
• Have a maximum loan to value typically of no more than 85%
• Have a minimum property value of £60,000

Lenders that offer this include Natwest, Santander and Halifax. But the option is only available through a broker and because of the tight criteria, only around 10% of mortgage prisoners are eligible to switch.

If you are in negative equity you’re unlikely to qualify for a modified affordability assessment so this option is not for you.

3. Never missed a payment? You may qualify for a cheaper deal

In 2018, banks and building societies collectively agreed to help existing borrowers who were on standard variable rates, providing they had no defaults on their payments history.

They said that if your mortgage is with a lender that offers new mortgages you can apply to switch to another like-for-like deal with the same lender. This is called a product transfer. By like-for-like, they mean the amount you borrow has to stay the same.

TSB is one example of this. If you’re with an inactive lender in the TSB banking group, you can request a product transfer of up to 120% LTV at the same rate as what borrowers with equity would pay.

You can apply for a product transfer if your lender currently offers new mortgages to homebuyers. You will need to be up to date with your repayments and have no defaults in the past year. Speak to your lender or a broker if you want to explore this option.

None of those apply to me – what’s next?

In early 2021 the House of Lords passed an amendment to the Financial Services Bill that would have required lenders to offer mortgage prisoners loans at no more than two percentage points above the base rate. But the government rejected the amendment. It argued that it would be an unacceptable intervention into the mortgage market.

Until the FCA and MPs reach a consensus on the issue, your options will remain fairly limited.

You may be able to join a collective legal action. This is when a group of people come together to take a firm to court on behalf of all those affected. It’s similar to the equal pay claims being brought against several major supermarkets right now.

Law firm Harcus Parker has launched legal action against TSB on behalf of mortgage prisoners whose loans were managed by the lender’s Whistletree brand and formerly owned by Northern Rock.

According to the lawsuit, affected homeowners have been overcharged by an estimated £50,000 each in interest by TSB, a result of being forced on to a more expensive rate than other borrowers. It’s worth looking into whether there are any collective lawsuits being put forward against the lender you’re locked in with.

If you’re really struggling and cannot keep up, speak to your mortgage lender immediately. 

It may trigger help you didn’t know you were entitled to. During the pandemic, the FCA introduced interim measures that allowed some mortgage prisoners to extend deadlines for repayment. While this has now ended, they could offer a temporary payment holiday, cut your monthly instalments or if applicable, they may switch you temporarily to interest-only repayments.

If you’re struggling in debt, don’t stay silent, here are your options.