Mortgage prisoners say they will never be able to retire

Britons pushed to breaking point by high interest rates, interactive investor finds.

• Mortgage prisoner case studies available on request.

Mortgage prisoners’ trapped on pricey standard variable rate loans are being pushed towards financial breaking point following the rise in the Bank of England base rate to 0.5%, says interactive investor.

Many already report having to use pension income to meet repayments and have given up hope of ever retiring.

The Financial Conduct Authority estimates that there are 47,000 mortgage prisoners. This excludes an addition 34,000 of people in payment shortfall and 18,000* who are near the end of their mortgage term as they wouldn’t be able to switch to a more competitive deal even if they were with an active lender.

In addition, an estimated 1.93 million** have become mortgage prisoners in England, rejected by lenders when trying to remortgage and unable to sell their homes because their flat has been caught up in the cladding crisis following the Grenfell disaster.

Borrowers stuck on typical standard variable rates (SVRs) are paying a rate of about 4.46%*** This compares to 2.44%, 2.71% and 2.85% for the average two-year, five-year and 10-year fixed rate deal, respectively.

On a mortgage with £100,000 left to pay over 10 years. a rise of 0.5% on the current SVR of 4.46% would add around £300 on to monthly repayments over one year, up from £1,034 to £1,059 a month.

By contrast, a borrower paying a rate of 2.44% on the same loan size and terms currently has monthly repayments of £940, rising to £963 following a 0.5% rate rise.

However, mortgage prisoners may be paying much higher variable rates of up to 9%, as their loans were sold on to unregulated mortgage lenders. A rise from 9% to 9.5% would push repayments up by £324 a year, up from £1,267 a month to £1,294 a month.

The extra amount that mortgage prisoners must already fork out to meet repayments every month is affecting their ability to build up financial resilience through contributing to savings, investments and pensions.

Mortgage prisoners have reported having to stop making pension contributions to cover housing costs or use income from pensions to pay their mortgages if they are old enough to access them (see notes to editors). Many say they have no savings, as these have been depleted by their excessive mortgage bills and they believe they will never retire as a result of being a mortgage prisoner.

Becky O’Connor, Head of Pensions & Savings, says: “The plight of mortgage prisoners highlights the ‘house of cards’ effect on our finances when one big bill spirals out of control: the knock-on impact for other parts of your finances can be disastrous.

“Unfortunately, a common casualty of being a mortgage prisoner is long-term savings and investments, such as pensions.

“Here is a group which for years, has been paying well above the odds for their home loans. The knock-on effect for many mortgage prisoners is that they have had to use savings and even sacrifice pension contributions in order to keep the roofs above their heads.

“Some, who are already able to access their pensions, have had to use their pension money to meet mortgage repayments rather than to fund their retirements. As a result, some say they fear they will never be able to retire.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Being trapped on a pricey mortgage with no way out places a significant pressure on budgets, and can also take its toll emotionally. The rate rise combined with the upcoming hike in national insurance contributions, rising energy prices and ballooning inflation threatens to push some of those already facing higher than average household bills to breaking point. This includes mortgage prisoners.

“Many mortgage prisoners have been unable to benefit from the era of ultra-low mortgage rates spanning over a decade. With the Bank of England signalling that the only way is up for interest rates to help tackle inflation which is expected to balloon to 7.25% this year, the mortgage repayment cost burden is set to intensify.

“A bumper mortgage repayment burden is the last thing leaseholders of flats wrapped up in the cladding crisis who are trapped in a standard variable rate mortgage need – many of whom have been saddled with huge cost for remedial works or fire patrols to address a problem that was not of their making.

“The £200 energy bill loan and the £150 council tax rebate for those in bands A to D offers precious little reprieve for the escalating cost of living crisis.”

Options for mortgage prisoners

In October 2019, the Financial Conduct Authority introduced new affordability rules that give lenders more flexibility to help mortgage prisoners switch to a cheaper mortgage.

The rules are based on your mortgage payment history, rather than the affordability assessment and considers income and expenses to determine if you can afford the mortgage repayments.

Lenders will use different criteria to decide whether they will accept application from mortgage prisoners.

These vary from lender to lender, but might include:

• a minimum of five years remaining on the mortgage
• remaining mortgage of at least £50,000
• minimum property value of £60,000
• a loan to value no more than 85%
• no missed mortgage payments in the last 12 months.
• a clear repayment plan if you are on, and want to remain on, an interest-only mortgage

Those affected can find out whether they are accepted under the new rules through Money Helper’s mortgage prisoner eligibility tool.

Quotes from mortgage prisoners*:

“I am 53, absolutely no savings, constantly moving money about to keep out of missed payments and I won’t have a lot of money if I retire but will definitely be working until 67 unfortunately despite having health issues.”

“I am 50. I haven’t been able to contribute to my pension, save or have critical illness protection or life insurance as a result of high mortgage payments. Financially, being a mortgage prisoner has left me really vulnerable and exposed to market conditions.”

“As a mortgage prisoner, I am constantly robbing Peter to pay Paul, juggling my finances on a weekly basis, just to keep the wolves from the door.”

“If I wasn’t a mortgage prisoner, I would have retired by now.”

“I am 53, no savings, no spare money, I do have a work pension and will be looking to draw down from that to pay off the mortgage. Dreading retirement, if we ever get there!”

“Very little pension, very little savings. We are looking at downsizing or moving out of the area. Equity release, if we can achieve enough equity. Feeling very stressed about our twilight years.”

Notes to editors:

• Case studies available.
• *Source: FCA Mortgage Prisoner Review November 2021
• **Source: Irwin Mitchell, Cladding: A Way Forward
• ***Source: Moneyfacts
• Interactive investor posed a series of questions to the UK Mortgage Prisoners campaign group. We asked: Have you stopped making pension contributions to cope with the cost of your repayments? Have your mortgage payments prevented you from being able to add to savings or investments? Have your mortgage payments meant that you have had to use previous savings or investments up? If you are able to access your pension, have you used any of your pot to pay off your mortgage or meet regular repayments, rather than leaving it for retirement income? Are you concerned that you will not have enough income in retirement as a result of being stuck on higher mortgage repayments?