Imprisonment without trial – the UK’s mortgage “affordability” scandal?

 

  

There is a tribe of some 150thousand home owners who are held as ‘mortgage prisoners’ by their lenders’ eye-wateringly high interest rates – locked-into standard variable rate (SVR) of around 5% from a time when Bank Rate even went as low as 0.25%. [and with standard mortgage rates soaring way above the UK base rates it represents a a mortgage ticking time bomb in the UK – with huge risk of arrears and repossessions].

A 100thousand of the this tribe are victims, through no fault of their own, but because their mortgage was sold-on to an organisation which isn’t at all authorised to offer new mortgage deals [a private equity or investment company (the likes of who snapped-up failure Northern Rock’s mortgages). Then there are an estimated 30,000 long-standing mortgage customers, who mostly took out their deal before the 2008 financial crisis, but who now are entirely unable to switch to a cheaper mortgage – despite being up to date with payments

That CAN’T be right, can it? That CAN’T be fair, can it? That CAN’T be justified, can it? NO, NO, and NO, but nevertheless it happened and STILL is happening today, isn’t it?

You see, it is all down to tough new mortgage rules primarily introduced 4 years ago by the Financial Conduct Authority (FCA), a regulator organisation intended to maintain the integrity of the financial markets in the UK.

[Although nominally independent, the FCA is in fact ‘accountable’ to the Treasury (i.e. Chancellor), which itself is ultimately responsible for the UK’s financial system and to Parliament].

Under scissorhands Chancellor George Osborne’s tenure, major changes to the mortgage market followed the City regulator’s mortgage market review (MMR) and were introduced to stop irresponsible lending, to focus-in on ‘affordability’, and so avoid the grave mistakes of the past. That move in the making of mortgage prisoners was further compounded by the blooming oppressive EU’s Mortgage Credit Directive (MCD) regulation of 2016 that set the UK minimum regulatory requirements of consistency in mortgages for residential property.

The term “shutting the stable door after the horse has bolted” comes to mind though, doesn’t it?

[The US subprime ‘mortgage crisis’ (involving lending to those with impaired credit records) was ‘caused’ by hedge funds and banks creating ‘mortgage’-backed securities, whence the insurance companies covered them with credit default swaps. Demand for mortgages led to an asset bubble in housing, and when interest rates went UP, adjustable mortgage rates skyrocketed, which sent home prices plummeting, and borrowers defaulting – thence followed the 2007 banking crisis, the 2008 financial crisis, and then the great Recession (the worse since the Great Depression of 1929)]

Plus perhaps, the other edict “throwing the baby out with the bathwater” is also applicable in this situation, because not only has the MMR quite rightly halted in their tracts the lenders of astounding stupidity, regarding their loan over-indulgence to first-time buyers or upsizing mortgagees, but it was, and is, a blunt tool that disenfranchises existing mortgage borrowers who are staying-put, by absurdly preventing them from being granted a much cheaper mortgage than they are actually paying already – how can that count as being “unaffordable”, in anyone’s imagination?

WHAT KIND OF FINANCIAL MADNESS IS ALL OF THAT, eh?

Well, it makes perfect sense for the greedy banks and lenders of course who are raking it in at the expense of the most vulnerable home owners, aren’t they?

You see the way that mortgage lending is currently structured here, differs greatly from the past, because nowadays people no longer take out a mortgage intending it for the full repayment term, but take out a mortgage on a short-term introductory deal, say for 2 years, at a ‘fixed’ interest rate [or a BR tracker rate], and at the end of that period, they are automatically shunted-onto the lender’s very expensive SVR interest rate – at that point of course they would simply look for another ongoing deal with their existing lender or even a different one.

However, the new rules will now scupper them from getting another mortgage deal at all, if they fail to meet the FCA’s & EU’s new rules, so they are trapped into paying an excessive monthly amount for the rest of their term – driving them into poverty on the pretence that a cheaper mortgage would NOT be affordable – even Alice in Wonderland’s Mad Hatter couldn’t have dreamed that one up could he, eh?

[THE CURRENT TOUGHER MORTGAGE RULES: lenders have to check how much borrowers earn (that alone can scupper those with their own business if earnings are not considered reliable enough on paper), and check every detail of their finances and spending to establish how much they have left after regular expenditure (backed-up with evidence); ‘interest-only’ mortgages have to be covered by a “credible” capital repayment vehicle (other than the sale of the house); lenders must stress-test ‘affordability’ – like by testing ability to pay if interest rates go up during first five years of the deal; lenders’ staff have to be qualified and able to assess customers]

This blind idiotic application of the rules is driving affected borrowers into the ground by preventing them from paying the ‘going rate’ – they can end up paying at least double what they should – as much as say £1,000 EXTRA per MONTH. That is a scandal of epidemic proportions, surely?

For example, you can have somebody on an interest only mortgage 2 year deal [perhaps because of a relationship breakdown], but when that ends they are denied a cheaper new deal as ‘unaffordable’, so is forever imprisoned on a high variable rate, and if their circumstances normalise, they are even totally prevented from returning to a ‘repayment mortgage’ although it is actually less costly each month than their current interest-only payment – so not a penny is paid-off the capital sum either.

People are incredulous to find that, despite having an exemplary repayment history (never missed a payment) they are denied a remortgage as the lender claims “it can’t be afforded”, when it is actually 20% less than they HAVE been paying for donkey’s years, eh?

This whole situation whereby people have been shoved unceremonially onto their lender’s highest rates is compounded by the current rise (August) in Bank Rate which means lenders have immediately bumped-up their SVR’s to match it, rather than absorbing it as they should have in light of their already making a killing, eh?

However, you may have heard that a consortium of the major lenders [UK Finance, the Building Societies Association (BSA) and the Intermediary Mortgage Lenders Association (IMLA)], are embarking on a charm offensive [in response to an FCA’s challenge] and are making a voluntary commitment to help these longstanding borrowers, by offering them the ability to switch to an alternative product with better interest rate, and so they say address the problem of attempted remortgagors being locked-into SVR – indeed they expect to deliver it by this December, no less?

Well, if you really think that the wicked witch has metamorphosed into the fairy godmother, dream-on everybody? The scheme is so restrictive with its multiple exclusions that it will only apply to little more than say 7% of those afflicted, and certainly it won’t help those who are in great financial pain and are struggling the most under the unfair yoke of enforced SVT, will it?

[Borrowers are only eligible for the new scheme with such product as being offered by their ‘existing’ lender (a massive market restriction), and only if there is at least £10,000 of outstanding mortgage, and at least 2 years left on the loan, and if they not in arrears, and additionally they not allowed any change of term, nor adding or removal of a party to the mortgage, nor allowed additional borrowing – all common options that might be sought on remortgaging, eh?

 

[There is NO solution currently on the table to the UK’s ‘mortgage prisoners’ problem, although the lenders consortium initiative is indeed a welcome START, but there is an uncharted and uncertain path ahead for those other many thousands of home owners involved]

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