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Thousands of buy-to-let mortgage prisoners are stuck in a trap of paying costly loans because they can’t afford to take out new borrowing.
The catch-22 is the landlords have mortgages with defunct lenders like Northern Rock, Mortgage Express or Bradford and Bingley but are paying rates as high as 8 per cent because they cannot afford to remortgage to a cheaper rate.
A London School of Economics study reckons 195,000 borrowers are mortgage prisoners and wants the government to help them. Many borrowers are property investors who first took out a mortgage before the financial crisis in 2007-08.
One of the significant issues, says the LSE, is that investment firms that do not offer loans run the lenders, so landlords must go to other lenders with stricter borrowing terms and reject their applications.
This traps borrowers in paying standard variable rates of up to 8% interest.
The LSE is suggesting the government considers two options to solve the problem:
“Borrowers face financial pressures that affect their health, and the current economic context means that without help, an increasing number will likely lose their homes,” it says.
“Those households still prisoners are the victims of circumstances that were not their own. These [recommendations] will hopefully enable a majority of prisoner households to progress towards returning to the mainstream and active mortgage market.”
The LSE estimates around one in three (66,000) mortgage prisoners could refinance if they wanted but failed to do so. Of the rest, 77,000 are unable to switch loans, 30,000 are unlikely to benefit from changing, and the rest (47,000) fail affordability tests.
Read the full LSE report on mortgage prisoners
In 2014, regulators changed mortgage affordability rules to stop lenders from offering high-risk loans, which led to the financial crisis. The move aimed to help borrowers change products with their existing lenders but did not help borrowers with closed-book lenders.
These borrowers found they could not pass affordability tests to switch lenders and are stuck on high-interest variable rate loans.
The worry is these borrowers will lose their properties because they cannot afford to pay their current loans or move to another lender.
A closed-book lender is a financial jargon for a mortgage company that has stopped lending. The Financial Conduct Authority no longer regulates them, so they cannot make new loans. Examples include Northern Rock, Mortgage Express and their subsidiaries.
Money Saving Expert Martin Lewis argues borrowers are probably mortgage prisoners if they can answer yes to both these questions:
Few mainstream lenders offer help to mortgage prisoners.
If you want to switch away from a closed-book lender, try West Bromwich, NatWest, Halifax or Santander.
Customers are accusing the TSB of overcharging them by £50,000 each as their mortgage rates were higher than those of other borrowers. Lawyers Harcus Parker has started legal action for anyone with a Whistletree branded loan bought from Northern Rock.