Mortgage prisoner explosion: why a new generation is at risk of crippling rates

A person trapped in their house

Could a reversal in the property market see a new wave of mortgage prisoners? CREDIT:RICHARD ALLEN


Falling house prices – coming just at the time of a resurgence in low-deposit home loans – could see the creation of a new generation of “mortgage prisoners”.

Prices dropped by 0.2pc in May, the third monthly fall in a row, according to Nationwide Building Society, marking the biggest sustained decline since the aftermath of the financial crisis in 2009.

Rules introduced following that crisis were responsible for creating the first wave of “mortgage prisoners”.

This group – thought to be around a million strong – typically borrowed heavily, putting down only small deposits, in the last years of the 2005‑07 housing boom.

Some were existing homeowners who remortgaged to draw down property equity. But as prices fell and the credit crunch took hold, lenders were subsequently forced to tighten their “affordability” checks, leading to borrowers being refused new deals.

Instead, when their original deals expired, they were forced on to far more expensive “standard variable rates” (SVRs). And there they stayed: unable to secure a better rate with their existing lender or to switch elsewhere.

Banks’ SVRs are typically twice as high as the best fixed deals being offered to new customers. Telegraph Money has been inundated with correspondence from readers who were horrified to find themselves paying high rates “because they couldn’t afford to swap to a lower one”.

But now there are fears that the number of people trapped in this way could grow, thanks to an explosion in the number of low-deposit, high “loan to value” deals, coupled with stagnant or falling house prices.

Draconian tax policies such as those mooted by Labour, under which council tax could be replaced with a form of land tax, could make the problem far worse, with many homeowners thrust into negative equity.

Those who have struggled to scrape enough cash together to put down a deposit at a time when the growth in prices has far outpaced wages are most vulnerable.

Last month there were 287 mortgages available where only a 5pc deposit is required. That compares with 190 two years ago and just six in 2009.

Intense competition is encouraging lenders to target first-time buyers with small deposits because this form of lending is more profitable.

A new report from Trussle, an online mortgage broker, calculated that people on SVRs were paying an average of £4,900 more than they would be on competitive fixed rates.

The report exposes individuals lenders’ approaches, showing the difference between their SVRs and best fixed rates over the six months to January this year.

For instance, Lloyds, Britain’s biggest lender, had an average SVR of 3.83pc and an average two-year fixed rate of 1.79pc – a gap of 2.04 percentage points.

Despite having a lower SVR (3.73pc), HSBC was found to have the highest difference of a major lender.

There was a 2.66pc gap between the SVR and its average two-year rate of 1.08pc. Ishaan Malhi, the founder of Trussle, said that if recent trends continued, recent borrowers with small initial deposits were at risk of negative equity.

He said: “Once in negative equity it can be extremely difficult to remortgage and in turn move home.

“Those unable to remortgage run the risk of ultimately lapsing on to their lender’s SVR, incurring huge interest charges every year. Being in negative equity while stuck on an SVR is a dangerous situation for anyone.”

‘I’ve been a mortgage prisoner for eight years and there’s still no way out’

‘I’ve been a mortgage prisoner for eight years and there’s still no way out’ Gary McCabe, 38, bought a property in Belfast with his brother at the height of the property boom – just before the crash.

In October 2007 they took out a “self certification” mortgage on a three-bedroom semi with lender The Mortgage Business, planning to rent the house out while they waited for prices to rise – at which point they would sell for a profit.

But the crisis was already under way and by the time their tracker-rate mortgage expired, in 2009, lenders had pulled away from all but the most creditworthy borrowers. Their property was worth less than the mortgage.

They moved on to TMB’s SVR, initially at 4.84pc and then 4.95pc. They have been stuck on this rate since 2011 despite calling the lender (which became part of Lloyds following its acquisition of HBOS) several times a year asking to be moved to a new fixed-rate deal.

The brothers have to add £350 a month to the rent they collect to service the £900-a-month loan, as well as make mortgage payments on the homes they live in.

Despite repeated requests, Lloyds refused to move them to a cheaper deal.

“We’ve never missed a payment,” said Mr McCabe.

“It feels like we’ve been held to ransom.”

Lloyds eventually offered Mr McCabe a two-year rate of 4.89pc, barely a saving on his current rate.

The bank said: “We are committed to helping our customers find the mortgage product which is most suitable to their circumstances.”

Ray Boulger of John Charcol, the mortgage broker, said there was little Mr McCabe could do but wait or put more cash into the property to reduce the loan, something the brothers say they can’t afford to do.

“He’s particularly unlucky,” Mr Boulger said. “He bought the property at the top of the market and in Northern Ireland. In almost any other part of Britain he’d probably be back in positive equity now.

“It doesn’t alter the fact that when signing up to a long-term contract you have to look at the period beyond the initial term.”

Charlotte Nelson of Moneyfacts, the data firm, said the boom in 95pc deals was putting many people at risk.

Relatively small falls in value could eradicate the equity obtained via the deposit, she warned.

“While mortgage rates are currently low it would be wise for borrowers to consider overpaying their mortgage to build up extra equity.”