UK: 'Mortgage Prisoners': FCA Proposes A Regulatory Key To The Cell Door

Last Updated: 8 May 2019
Article by Julie Patient, Roger Tym and Virginia Montgomery

One of the key areas for improvement identified by the FCA in its Mortgages Market Study final report is to make it easier for so-called 'mortgage prisoners' - longstanding borrowers on relatively high reversion rates (the interest rate that applies once any introductory rate ends) - to switch to new deals. It is therefore proposing changes to its responsible lending rules and guidance to introduce a modified affordability assessment for eligible consumers. Where lenders choose to take advantage of the new regime, many of the changes will mean a relaxation of the current affordability requirements to help set 'mortgage prisoners' free.

What's the background?

The FCA believes that post-financial crisis changes in regulatory requirements for affordability assessments and in lending practices left some consumers on relatively high reversion rates when their introductory deals came to an end. These 'mortgage prisoners' have been unable to switch to cheaper mortgages despite being up-to-date with their payments. Most 'mortgage prisoners' are with firms that are inactive and/or not authorised to lend.

A voluntary industry agreement among active lenders has already been introduced

Over 65 active lenders (around 95% of the market) have signed up to a voluntary industry agreement to help existing customers who previously didn't qualify for a switch to find a better deal via an internal switch, providing they meet certain minimum criteria. Lenders have already contacted qualifying customers to offer a switch to a better interest rate. The FCA will monitor what proportion of 'mortgage prisoners' have mortgages with the 5% of active lenders that have not yet signed up and keep the effectiveness of the agreement under review.

Proposed changes to the FCA's responsible lending rules and guidance in MCOB will tackle the more complex issue of 'mortgage prisoners' with inactive firms

For 'mortgage prisoners' with inactive firms who are not looking to borrow more, the FCA is proposing changes to its current responsible lending rules and guidance to remove regulatory barriers for lenders who might be willing to lend to these customers. The existing affordability assessment will be retained, but lenders can choose to carry out a modified assessment for these customers, provided that they can demonstrate the new mortgage is more affordable than the customer's present one.

Who will be eligible?

The FCA proposes that eligible consumers must meet all of these criteria:

  • Be up-to-date with payments on their current mortgage for the 12 months immediately before their new mortgage application
  • Not want to borrow more, other than to finance any relevant product or arrangement fee for the new mortgage
  • Be looking to switch to a new mortgage deal on their current property, although the FCA is seeking views on whether the modified assessment should also be available to those looking to switch to a new mortgage deal on a different property (eg downsizing)

What does 'more affordable' mean?

The proposed definition of 'more affordable' mortgage differs depending on whether any product or arrangement fees have been added to the mortgage or the consumer is paying for them upfront:

  • Fees added to the mortgage: the new mortgage must have both a lower interest rate and lower monthly payments during the introductory deal period (or the whole term if there's no deal) than the existing mortgage.
  • Fees paid upfront: the total expected cost of the new mortgage during the introductory deal period (or the whole term if there's no deal), including the fees paid upfront, must be less than the consumer would have paid on their existing mortgage over that time and the new mortgage must have a lower interest rate during the introductory deal period (or the whole term if there's no deal) than the existing mortgage.

The FCA thinks it's important for lenders to bear in mind, when assessing affordability, that when consumers pay relatively large fees upfront this can significantly increase the short term cost of their mortgage without being reflected in the monthly payment.

The FCA is also asking for views on adding another condition to its proposed definitions of 'more affordable' that brings in the existing reversion rate of the new lender, but it acknowledges that this could restrict participation by some smaller or specialist firms. It is also not proposing to restrict the revised affordability assessment to consumers on a reversion rate.

Worked examples of the proposed definitions are provided in Annex 1 to the consultation. However, it's not clear from the FCA's examples how, in a scenario where there is no introductory interest rate under the new mortgage and the applicable interest rate would be variable, lenders would be able to establish with any certainty if such rates under the new mortgage would definitely be lower than the current rates throughout the new mortgage term. The FCA's proposed new guidance only provides that references to future payments or interest rates in the new rules should be taken to be on the assumption that there is no variation to the reference rate in question unless the mortgage contract expressly provides for a variation. It gives the example of a lifetime Bank of England base rate tracker, where it should be assumed that the Bank of England base rate won't change.

What about extending the mortgage term to make it more affordable?

The FCA doesn't think it's necessary to ban term extensions, even though it means that consumers could end up paying more overall. However, it proposes a requirement on lenders to make this point clear to consumers. If the new extended term would take the consumer past their anticipated retirement age, the FCA also proposes a rule to require lenders to consider income in retirement.

Lenders will be able to disapply some existing MCOB rules and guidance

The FCA intends to allow lenders that choose to use the modified assessment to disapply certain of its existing MCOB rules and guidance in relation to:

  • income and expenditure – Lenders can still choose to apply these rules and the FCA proposes new guidance so that lenders can take into account the fact that the consumer is up-to-date with payments and moving to a more affordable mortgage;
  • future changes to income and expenditure – As mentioned, where the new mortgage would extend into retirement, the FCA proposes a new rule requiring lenders to consider whether post-retirement income would be sufficient to meet the consumer's mortgage commitments. The FCA also proposes new guidance that lenders should take a prudent and proportionate approach to assessing post-retirement income;
  • interest rate stress testing - Where lenders do choose to carry out some form of stress testing, new guidance is proposed to take account of the fact that the consumer is currently meeting payments on a higher rate than on the more affordable new mortgage;
  • interest-only mortgages – However, existing rules and guidance would still apply where consumers want to increase the proportion of the loan on an interest-only basis or they're looking to move from capital repayment to interest-only. Lenders would also still be required to review any interest-only mortgages in line with current MCOB requirements.

New disclosure and reporting requirements

Lenders that make use of the modified affordability assessment will be subject to new disclosure requirements, including a requirement to disclose to consumers the basis on which their affordability has been assessed and to provide some additional disclosures about potential risks. New and revised reporting requirements will also apply when submitting Product Sales Data reports.

New one-off consumer communication requirements for some firms

The FCA is proposing that inactive lenders and administrators acting for unregulated firms will be required to review their customer books to identify eligible consumers and write to them highlighting the rule changes outlined above and that they may be able to switch, and directing them to further information. This is a one-off requirement, to be carried out within 13 months of introduction of the new rules.

What about active lenders?

For active lenders, given that not quite all of them have signed up to the voluntary agreement on switching, the FCA proposes to restrict the use of the modified assessment to those that operate a policy for offering existing customers the ability to switch to a more affordable mortgage product. The FCA thinks this should help customers of active lenders who might need to switch again to avoid a higher reversion rate than they would otherwise have been on.

Proposed changes to mortgage reporting requirements on mortgage books sold to unregulated firms

In its Mortgages Market Study final report, the FCA states that it wants to improve its knowledge of consumers whose mortgages are with unauthorised firms, and has therefore consulted on changes to its mortgage reporting requirements on mortgage books that have been sold to unregulated firms. Final rules are expected this summer.

For more on the FCA's other findings in its Mortgages Market Study final report, take a look at our blog 'Mortgages Market Study: FCA's final report puts consumer information, innovation and freeing 'mortgage prisoners' front and centre'.

What's next?

The FCA's consultation on changes to its responsible lending rules and guidance closes on 26 June 2019. It plans to publish a policy statement with final rules and guidance in Q4 this year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions