When we think of a prisoner, we often imagine someone isolated from the world, punished for their wrongdoings. But what if I told you that in the U.K., tens of thousands of "prisoners" roam the streets, punished for a crime they didn't commit? These are mortgage prisoners, and their jail is their mortgage debt.
What are mortgage prisoners?
Mortgage prisoners are homeowners who can’t switch to a new interest rate with their mortgage lender or remortgage elsewhere. As a result, when their fixed rate ends, they can get stuck on their lender’s Standard Variable Rate (SVR) – which tends to average 3% or 4% above the Bank of England's base rate and can change month to month. These mortgages can be unaffordable and make it hard to budget for the future. Ultimately, if they can't afford the SVR payments, mortgage prisoners may be forced to sell their home.
Typically, people become mortgage prisoners when their mortgage lender stops offering mortgages. In this case, their mortgage moves into a “closed book”, which means they can’t get another mortgage with their lender and, if they’re facing affordability challenges, they may not be able to remortgage with another lender. That leaves two options for most prisoners: sell the home or choose to move onto the SVR, even if it’s unaffordable.
While this type of imprisonment may not fit the traditional image of a “prisoner,” the struggle faced by these homeowners is no less real. Most mortgage prisoners have committed no crime; many may be up to date on their payments and are even careful managers of their money. But without the ability to lock in a new mortgage deal, they’re stuck with their lender and at the mercy of their SVR.
Why do mortgage prisoners exist?
The term “mortgage prisoners” emerged following the 2008 financial crisis; the term actually didn't even exist before. Between 2001 and 2008, mortgage lenders operated under more lenient policies and criteria, sometimes offering interest-only, adjustable-rate or self-certification mortgages – where they didn’t verify how much money you make – without the rigorous stress testing we see today.
After the crisis, the government introduced regulatory changes to respond to ongoing economic fallout and prevent another financial crisis from occurring. These changes included the introduction of new mortgage lending standards and a crackdown on risky lending practices.
But as a result, many low-credit or low-income individuals who had secured mortgages under the earlier, more irresponsible lending conditions found themselves trapped by the new, more stringent lending rules – and ineligible for remortgaging.
Things compounded when major UK mortgage lenders Northern Rock and Bradford & Bingley collapsed. The government “nationalised” their mortgage books, taking roughly 740,000 mortgages into government control before selling them on to investors under the UK Asset Resolution (UKAR). As the government and most investors aren’t mortgage lenders, this meant all of those mortgages moved into a closed book.
For homeowners unable to remortgage with an active lender, there was no way out – thousands of people became mortgage prisoners. It seemed like the right action at the time, but this negatively impacted a lot of people, leading to reports of “anxiety, depression, physical and mental ill health” among homeowners as interest rates went up and the threat of losing their homes became more real.
Since the crisis, though the plight of mortgage prisoners has become more widely known in the UK, the situation hasn’t really improved. But why?
By the numbers
In 2019, the Financial Conduct Authority (FCA) – a public regulatory body operating under the watch of the U.K.'s Treasury and Parliament – estimated there were still around 47,000 mortgage prisoners in the UK.
To address this problem, the FCA introduced new regulations which allowed mortgage lenders to offer a modified affordability assessment to some customers, waiving some of the stricter affordability rules at the lender’s discretion. These regulations, which were introduced on the 28th October 2019, were meant to help people switch to better rates or remortgage from a closed book to an active lender.
This action seemed like a very positive change. After years of campaigning for better support, mortgage prisoners and advocates like Martin Lewis were finally seeing results.
But a 2022 study found that the modified affordability assessment only led to about 200 mortgage switches. That means there could still be approximately 46,800 mortgage prisoners in the UK.
This lack of impact is partially because the FCA’s modified affordability assessment was to be used at the discretion of lenders – meaning they didn’t have to offer it if they didn’t want to. As a result, many didn’t.
But this isn’t just because lenders aren’t willing to help prisoners – it’s because the modified assessment itself wasn’t necessarily compliant with lenders’ own risk and lending policies. That meant many lenders couldn’t offer the assessment without breaching their own lending standards.
Kath Scanlon, a leading expert on the prisoner phenomenon, put it best: “The focus of the FCA has primarily been on products rather than on the interaction between products and customers. This has made their recommendations partial and potentially unworkable for lenders. The FCA has taken some limited steps to deal with the problem in conjunction with mortgage lenders, but acknowledged that these would benefit at most only a tiny proportion of the existing prisoner population.”
That disconnect – between the regulation and how it can actually be used – is representative of a lot of support for prisoners: it’s disjointed, and as a result, not very effective, according to Scanlon. This is because one lender, or even a group of lenders, won't have the power to support every prisoner on their own.
Though there are working groups within the mortgage industry currently working to find solutions to this problem, what is needed is systemic, coordinated support led by the government – and soon.
These prisoners deserve a safeguard against the very system that has ensnared them.
Freeing mortgage prisoners for good
At first, the term “mortgage prisoner” made a lot of headlines and earned well-deserved attention on the national stage. But names like this are important, and the word “prisoners” can imply a level of guilt on the part of trapped homeowners for their unfortunate circumstances – which, as we know, is not usually the case.
So this name can deflect from the actual cause of this phenomenon, and a dark irony emerges. These homeowners suffer the consequences of systemic failings. They find themselves indentured to the owner of their mortgage with little assistance, all for the “offence” of pursuing the dream of homeownership. Undoubtedly, the punishment does not match the “crime.”
So what can we do?
The first step we can take is to revise the terminology. A more fitting description might be “policy-constrained homeowners,” a term that identifies the root issue, which is constrictive legislation, not a failure on the part of a homeowner.
Within this redefined context, the real problem comes into view. Those grappling with this predicament are in dire need of a comprehensive solution, consisting of government intervention, individual support, and lender collaboration. These prisoners deserve a safeguard against the very system that has ensnared them.
The action of lenders and regulatory bodies is critical. Mortgage lenders must always be advocating for new and better support and forbearance measures to help ensure good outcomes for their customers. At an active mortgage lender like Gen H, no homeowner should now be able to become a mortgage prisoner because of this bespoke support.
It’s important to say that Gen H doesn’t offer modified affordability assessments, so we’re part of this problem too. We do offer alternative options that can lessen financial burdens on individuals which are compliant with our lending policies (like our income booster, which can help with affordability constraints) but these won’t work for everybody. Only with government-led regulatory and policy change will all lenders be able to provide mortgage prisoners with the responsible and systemic support they need and deserve.
One of the biggest challenges faced by lenders and the FCA in trying to solve the mortgage prisoner crisis is actually getting in touch with these homeowners. So if you think you might be a mortgage prisoner, you should review MoneyHelper’s page on the help that might be available to you. To get free, unbiased mortgage advice, you can reach out to StepChange. And if you’d like to learn more about mortgage prisoners and the government’s response, you can find more information in the bibliography below.
Jemima Kingdon Jones is pursuing a dual BA in English Literature at Columbia University and Trinity College Dublin and a marketing intern at Gen H. She is the first year Vice President of the General Studies Student Council, a semi-professional show jumper and an aspiring author.
Baily, M.N., Litan, R.E. and Johnson, M.S. (2008) ‘The Origins of the Financial Crisis’, Initiative on Business and Public Policy at Brookings -Fixing Finance, 3(1), pp. 14–18. doi:https://www.brookings.edu/wp-content/uploads/2016/06/11_origins_crisis_baily_litan.pdf.
FCA (2014) New mortgage rules come into force, FCA. Available at: https://www.fca.org.uk/news/press-releases/new-mortgage-rules-come-force (Accessed: 21 August 2023).
FCA (2023) Implementation Group on changes to deliver switching options for mortgage prisoners, Financial Conduct Authority. Available at: https://www.fca.org.uk/firms/implementation-group-proposed-changes-responsible-lending-rules
FCA (2022) Understanding mortgage prisoners, FCA. Available at: https://www.fca.org.uk/data/understanding-mortgage-prisoners (Accessed: 22 August 2023).
Ivens, F. (2023) Mortgage holders ‘suffer in silence’ on high Standard Variable Rates, This is Money. Available at: https://www.thisismoney.co.uk/money/mortgageshome/article-12194311/Mortgage-holders-suffer-silence-high-standard-variable-rates-options.html
LSE (2023) Costed solutions to potentially free 200,000 mortgage prisoners proposed in LSE london report, London School of Economics and Political Science. Available at: https://www.lse.ac.uk/News/Latest-news-from-LSE/2023/c-March-2023/Costed-solutions-to-free-mortgage-prisoners-proposed.
Scanlon, K. et al. (2023) ‘Releasing the mortgage prisoners’, LSE -Proposed solutions and illustrative costings., 1(1), pp. 3–27. doi:https://www.lse.ac.uk/geography-and-environment/research/lse-london/documents/Reports/LSE-mortgage-prisoners-final-report.pdf.
Uk Asset resolution Limited and UKAR (2015) Vol 1, Annual Report and Accounts 2015. Bingley, West Yorkshire: Williams Lea group.
This article is intended for informational purposes only and should not be taken as any kind of advice or endorsement. The views of the author may not represent the views of Gen H.