What to do if you're a mortgage prisoner

Mortgage prisoners are those who want to remortgage but who find themselves trapped in their current deal. Find out what you can do to improve equity and affordability and get out of this trap.

Key points:

  • You become a mortgage prisoner if you're unable to remortgage, usually due to equity or affordability problems
  • The 2014 Mortgage Market Review (MMR) has been criticised for being too strict, stopping people from remortgaging to cheaper deals
  • You can speak to a mortgage adviser to help you find a remortgage deal by requesting a call back or phoning 0800-073-1959[1]

The term 'mortgage prisoner' is used to refer to anyone who has become trapped on their current mortgage deal, unable to remortgage or move house.

There can be several reasons for this; for example, the financial crisis of 2007-8 created many mortgage prisoners as a result of plummeting house prices which diminished the equity of homeowners.

More recently, the introduction of new mortgage affordability rules under the Mortgage Market Review (MMR) of 2014 meant more and more people found themselves trapped in their mortgage deal, unable to get through the affordability criteria needed to remortgage.

It's also possible that you'll find yourself hitting a brick wall when it comes to remortgaging if you've had credit problems since buying your home.

It's easy to despair if you feel you're trapped on your lender's standard variable rate (SVR), unable to remortgage to a better deal, but there are things you can do to improve your chances.

Remortgaging with low, no or negative equity

Before tougher affordability rules came into play, the main reason people found themselves on an uncompetitive mortgage rate and unable to move was low or negative equity.How to cut the cost of your mortgage

Negative equity is when your home is worth less than the amount you have outstanding on your mortgage. This makes it very difficult to sell up and to buy your next home, but also to remortgage.

You might also find it extremely difficult to remortgage if you're not in negative equity, but falling house values have meant your equity has diminished to below 5-10%, the minimum needed for most remortgage deals.

If you're unable to remortgage at the end of an existing deal, you'll be moved onto your lender's SVR, which may be more expensive. But there are things you can try to get yourself out of this mortgage lock-up:

Speak to your lender

Rearranging a mortgage when you're in negative equity can be very difficult, so it's important to speak to your lender about your situation.

"It's well worth checking what the existing lender may be able to offer," said London & Country's David Hollingworth. "Some lenders will allow a switch to an alternative rate even though borrowers are in negative equity."

As long as you keep paying your mortgage you might be able to pull yourself out of negative equity because the price of your home has risen and/or you've reduced the amount you owe

Wait it out and overpay

If you don't need to move any time soon, it might be worth playing the waiting game.

As long as you keep paying your mortgage you might be able to pull yourself out of negative equity because the price of your home has risen and/or you've reduced the amount you owe.

If you're able to overpay your mortgage, that would help reduce your debt more swiftly. Check with your lender that you're able to overpay - many allow you to do this without a charge, typically by 10% a year.

Proving you can overpay your mortgage may also make remortgaging and buying another home further down the line easier as borrowers will need to borrow less.

Negative equity mortgages

If you have to move for family reasons some lenders may offer a negative equity mortgage, but this typically comes with a number of caveats.

Your move may have to be essential - you're having a baby and need more space, for example - and you may need to be in permanent employment and to be able to prove you can afford the new mortgage.Try our mortgage calculator

However, these options are rare and aren't widely advertised. Speaking to your lender and to an independent mortgage adviser will help you explore your options.

If your equity is just very low rather than negative, you may be able to find a 100% mortgage.

However, you need to be aware that these are usually a form of guarantor mortgage so you need to consider the implications for your guarantor as well as yourself.

Problems remortgaging since the Mortgage Market Review

The 2014 MMR rules mean that many borrowers are trapped on their current lender's SVR as they find it hard to satisfy affordability criteria which have become stricter since they initially took their mortgage out.

This can particularly affect those who've had a change of circumstances in the meantime, such as those who've started a family or changed jobs.

Problems created by the MMR

Post-MMR, some borrowers found themselves in the frustrating and perplexing situation of being unable to remortgage to a new deal with lower repayments than their current mortgage, on the grounds they wouldn't be able to afford it.

The fact that a borrower has been paying their mortgage at a higher rate for a period of time should, in my view, count at least in part toward helping existing borrowers to find a solution
David Hollingworth, London & Country

Until 2014 lenders chiefly looked at a borrower's income to decide whether their mortgage was affordable, but now applicants must answer questions about income and outgoings.

"The phrase 'mortgage prisoner' is a relatively new phenomenon," said Hollingworth. "After the credit crunch hit, lenders tightened their criteria substantially.

"That was initially due to tough funding conditions for lenders, but the tightening of criteria was subsequently set in stone through the new rules of the Mortgage Market Review.

"Affordability criteria is now tighter, interest-only mortgages are harder to secure and the self-employed and older borrowers can find that lenders are more restrictive.

"That becomes a particular problem for those who may have taken a mortgage before the credit crisis, when lending rules were looser.

"If borrowers can't manage to meet the new, tougher rules then it could leave them with limited options to switch, or for taking their current mortgage to a new property [porting].

"The fact that a borrower has been paying their mortgage at a higher rate for a period of time should, in my view, count at least in part toward helping existing borrowers to find a solution."

Speak to your lender

If you're struggling with affordability rules, your current lender might be able to help.

Your existing lender may be able to offer a straight switch to a new deal, for example, but you should still check the market to ensure you're getting the right product.

Just because one lender can't help it doesn't mean that another won't be more amenable, so taking advice makes sense rather than assuming that you've become a mortgage prisoner
David Hollingworth

Prepare for remortgage

Thinking about remortgaging well in advance could help you to meet the new tighter criteria.

Consider whether you really need things like gym memberships and compare and switch bills such as gas and electricity and broadband to cut your living costs.

Ask a mortgage adviser

Speaking to a mortgage adviser may help, as they'll be able to guide you through the process and see where you may be going wrong with affordability rules.

"As the MMR has bedded down lenders have looked at where they have perhaps been too tight in their interpretation of the rules," said Hollingworth.

"Just because one lender can't help it doesn't mean that another won't be more amenable, so taking advice makes sense rather than assuming that you've become a mortgage prisoner."

Remortgaging with credit problems

If your credit rating has slumped since you got your mortgage you could find it harder to remortgage, but you may still have options.

While sub-prime mortgages have become a thing of the past since the MMR, lenders can still help borrowers who can prove affordability despite credit issues.How to improve a credit score

Lenders now use more checks to ensure that a borrower is able to pay their mortgage. You may be asked for more proof, including payslips and bank statements.

Also, be aware that different lenders apply different time limits to relatively minor credit issues before they discount them - for instance, some lenders won't want any late payments in the last two years, others might be ok with one in the last six months.

Speaking to an adviser will help match you to lenders that will accept your individual circumstances.

Improve your credit score

Spend some time improving your finances and building your credit rating back up. For example, it may seem counterintuitive, but using a credit-builder credit card in the right way could improve your credit rating.

Even if you take such steps the most competitive deals on the market may be out of reach, but the options available may be better than going onto your lender's SVR.

Speak to an adviser

If you're looking to remortgage but are worried you're affected by one of the above issues, it's worth speaking to an independent mortgage adviser.

You can arrange a call back from an adviser at L&C, or call them on 0800-073-1959.[1]

They'll be able to look at your finances and give you the right advice depending on your situation, and guide you through the best way to apply for your new mortgage.

By Emily Bater