An unexpected side-effect of affordability has been the creation of ‘mortgage prisoners’. It’s estimated that up to 150,000 homeowners are locked into default mortgage rates and cannot switch to a cheaper loan, effectively locking them in for the lifetime of the mortgage. These borrowers are the inadvertent victims of the affordability assessments brought in by the FCA back in 2014 which compelled lenders to check to see if applicants had the capacity to meet repayments under new criteria which allowed for different financial contingencies when evaluating eligibility.
Even though competitive monthly rates would be lower than their existing mortgage payments and these mortgage prisoners were not looking to increase their loans, they were prevented from taking out these new deals because they failed to meet the affordability criteria. Of the 150,000 borrowers affected, approximately 30,000 are with authorised lenders while the remaining 120,000 are with non-regulated firms, 10,000 of which have been offered alternative deals from their existing lender but are unable to switch.
In a bid to address this bizarre situation, the FCA has proposed in a letter to the Treasury Committee of MPs allowing mortgage prisoners to move to other lenders provided they are not increasing their mortgage. It’s a move welcomed by industry body, UK Finance, which points out that lenders have already voluntarily tried to assist borrowers.
Director of Mortgages, Jackie Bennett, states that regulatory change is now needed to “remove the barriers to helping the thousands more customers who are currently with inactive and unregulated lenders… [to enable them to take] a like-for-like mortgage”.
It’s clear that many lenders have been hamstrung by the legislation. In a recent FCA investigation into how firms assist those with long-term mortgage arrears, the findings were mainly positive. It found that firms were making appropriate arrangements to accommodate financial difficulties, observing individual circumstances, and designating call handlers to provide effective customer care. However, where customers were on high interest rates, the report found mortgage debt tended to increase and firms were found to be less diligent over TCF principles.
Until the FCA’s proposal is accepted and implemented, its therefore essential mortgage lenders don’t leave themselves open to complaints, triggering investigation. The FCA has identified a number of issues that lenders need to be wary of as follows:
- Incomplete record keeping – insufficient customer case files resulting in repeat requests for information
- Inconsistent handling of vulnerable customers – not identifying and assisting individuals in difficult financial circumstances
- Inadequate reviewing of arrangements – not engaging in proactive communication with customers to establish suitability of payments
- Inaccurate communications – not putting in place processes to review correspondence to ensure it contains the right information
- Lack of consideration of other options – issuing repeat requests for payment instead of offering other options for the repayment of arrears
- Narrow quality assurance processes – viewing calls in isolation rather than as part of a customer profile resulting in a fragmented picture of the customer
- Barriers to effective engagement – lengthy forms for the assessment of income, expenditure and individual vulnerabilities which the borrower is expected to complete without assistance from the lender
Putting in place effective customer complaint and remediation processes can help address these issues and protect the lender by demonstrating observance of the TCF principles. For example, customer case files need to document all communication with the customer, by whom, the guidance they were given and the outcome. This requires efficient data capture processes to build a holistic profile which allows the lender to better understand their customer, their history and their needs, facilitating better customer assurance. The systematic data collection of this documentation will then enable FCA reports to be generated more easily which can be used to support the lender’s case and prove that not just affordability criteria but also TCF principles were observed.
Age and affordability
It’s taken four years to bring about change with regards to mortgage prisoners but the tide does now seem to be turning. If the FCA’s proposals are accepted they will empower mortgage lenders to offer these customers alternative loans without having to adhere to the affordability criteria, freeing them from years of high debt. But while this situation is on the way to being resolved, it’s worth bearing in mind that the industry could be creating another potential problem associated with long-term debt.
Media reports suggest that four in ten first-time buyers will be over 65 when their mortgage matures saddling them with a lifetime of debt. This is another knock-on effect of the affordability criteria, as, in a bid to help borrowers get on the ladder, lenders have had to go beyond the traditional 25 year term. As of 2017, 34 percent of loans were for 30 years or more and both the market leaders (Halifax and Nationwide) now offer 40 year mortgages. The concern is that the length of these debts could outstrip the earning potential of these borrowers, increasing the risk of them falling into arrears. This could therefore create an entire generation of financially vulnerable borrowers and again expose lenders to FCA investigation under the TCF principles, making it vital lenders have complaint and remediation practices are in place.