Mortgage Prisoners
Gary Oxborough is Practice Principal at Barlow Irvin Financial Services. This month he is looking at “Mortgage Prisoners”. This is a problem that is very much in the news and it is something the Financial Conduct Authority are keen to see lenders working to resolve.
The phrase “Mortgage Prisoner” is one you may have seen in the press recently and it is certainly something that need needs explaining and looking into.
A “Mortgage Prisoner” is someone who, usually through no fault of their own, is trapped in an expensive mortgage that they cannot get out of. This is usually because the amount they owe on their mortgage is a higher proportion of the value of their property than lenders will currently accept. If you have a high loan to value mortgage and then property prices drop you could easily end up with a mortgage that is higher than the actual value of your home (known as negative equity). However, you could still be trapped in an expensive mortgage even without being in negative equity. For example, the vast majority of lenders are currently restricting mortgages to 85% of the value of the property whereas as recently as earlier this year you could find 95% mortgage deals on the market. If you have been on a special deal, such as a fixed rate, and this ends you will normally revert to the lenders Standard Variable Rate which could be quite a bit higher than your original rate and as such your payments could increase considerably. The normal process would be to remortgage onto a new rate, but if this is not possible because of the loan to value situation, you could be trapped on the higher rate.
The obvious question is how do I avoid this happening to me or how do I get out of “Mortgage Prison” if I am unfortunate enough to be in that position. As always, it’s better to make sure it doesn’t happen in the first place and the best way to do this is to make sure you are reducing the loan to value on your mortgage as quickly as possible. Most mortgage deals on the market will allow you to make overpayments of up to 10% of the outstanding balance every year without penalty. Just a small amount extra each month can start to positive effect on your mortgage balance. This can have a significant impact on your mortgage and save thousands of pounds in interest if you can keep doing it. Also it’s vital that if you have any concerns about your mortgage balance and the value of your home that you avoid adding any more secured debt, either by adding to your mortgage or taking out a secured loan. Whilst consolidating debt into your mortgage can save quite a bit of money, there are pitfalls that you need to be aware of when you do that so always seek professional advice before taking that step. Borrowing extra to add value to the property can be good, but make sure what you are spending on improving your home will actually add value (not everything you’d expect to add value actually will do).
If you are already in the situation where you think you are a “Mortgage Prisoner” it is important to speak to a professional advisor and not just bury your head. We can help to put plans in place to move you to a better position over time. There may even be options to get a better rate with by speaking with your existing lender.
One thing we do as a matter of course for our clients is regularly review their mortgage deals and if we spot this may be happening, we can work quickly with clients to try and resolve it with them. Please get in touch if you think we could help.
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As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.