MPs reject SVR cap for mortgage prisoners but rates dip

• Mortgage prisoners frustrated by MPs interest rate cap decision
• Lenders offering lower rates in April 2021
• One in seven homeowners have never switched their mortgages
• Saffron Building Society introduces self-build mortgages

Mortgage prisoners have been left frustrated by the UK government’s decision to vote down a law change for mortgages that could cut borrowing costs by hundreds of pounds every month.

Borrowers who took out high-interest loans with lenders amid the 2008-2009 financial crisis are often referred to as mortgage prisoners as many are tied to interest-only deals.

As investment firms offered the loans, many cannot switch to repayment mortgages as these lenders do not provide other mortgage options, and as a result, these borrowers are trapped on standard variable rates.

According to official statistics, approximately 250,000 Britons are stuck in this predicament, many of whom face repossession when their term ends due to being unable to afford exceptionally high rates, which have risen to 9% for some borrowers.

COVID-19 has also exacerbated the issue as many lenders adjusted their affordability requirements due to the COVID-19pandemic.

The UK government promised to find a solution to the mortgage crisis, and the House of Lords had amended the Financial Services Bill to introduce an SVR cap for those stuck in distressing mortgage deals.

The SVR cap would have allowed homeowners making eye-watering payments access to fixed rates, which could have cut some borrowers’ payments by GBP 800 a month.

However, MPs did a U-turn on their pledge and as a result, a quarter of a million people will remain tied to high interest-only rates.

The Financial Services Bill was rejected in the House of Commons by 355 votes to 271. Although the Treasury has insisted that it is working hard to find a solution to the problem, many borrowers are troubled by the news, having suffered years of financial hardship and emotional distress.

Conservative MP and economic secretary to the Treasury, John Glen, said that while the issue is being taken seriously, the “UK government cannot accept this amendment.”

Mr Glen said that based on evidence and figures produced by the government and analysis from the Financial Conduct Authority (FCA), “more than half of the 250,000 mortgage prisoners that borrowed from investment firms qualify for the normal risk appetite of lenders.”

He added: “As these homeowners can switch without the need for government intervention, law changes are not justified.”

John Glen went on to say that most of the remaining 125,000 people who are unable to switch providers would be unable to secure a new deal even if they were active in the market due to being in arrears.

Mr Glen advised those facing repossession to arrange an appointment with their lenders and agree on a repayment plan to avoid any further emotional or financial hardship.

He also said that “the 55,000 borrowers who cannot switch mortgage deals but are within active lenders are only paying 0.4% points more than similar borrowers on reversion rates” – implying that changes to the Bill are not necessary at this time.

However, fellow Conservative MP Kevin Hollinrake urged the British government to support those affected by the situation.

He said that while he understands that the challenge was not of John Glen’s making, the Conservative government is to blame for the problem, and so they have a duty to resolve the issue.

Mr Hollinrake highlighted that before the coalition government, people were borrowing in ways that are deemed unacceptable today, so they shouldn’t have to continue to endure.

Meanwhile, Rachel Neale, the head of the UK Mortgage Prisoner Action Group, represents several thousand borrowers, expressed her disappointment over the Commons result.

Rachel Neale said it is saddening that after 13 years, the UK government has failed to offer a practical solution to the problem.

She is now urging MPs to introduce a government-backed guarantee scheme akin to the Help to Buy incentive for first-time buyers to provide mortgage prisoners with some much-needed support.

Rachel Neale noted that first-time buyers have no borrowing history and are being offered a scheme. In contrast, homeowners tied to interest-only mortgages have been making payments for up to 13 years.

Her comments come alongside data from Boon Brokers revealing that one in seven homeowners in the UK have never switched mortgages.

One in seven homeowners have never switched mortgages

According to the independent mortgage, insurance and equity release brokerage firm Boon Brokers, 15% of mortgage holders in the UK have never switched mortgage deals.

The highest percentage of people are young people, likely due to them being relatively new to the housing market. However, over-65s followed, with 18% admitting that they had never switched mortgages.

Meanwhile, one in four participants revealed that they had not changed loans under the impression their current deal was absolute.

Even those who had switched home loans revealed that it had been years since they last changed their mortgage. According to Boon Brokers, 9% of those surveyed said they had not switched mortgages in over ten years, while a further 13% said they had been in their current deal for more than five years.

Boon Brokers founder Gerard Boon said: “The worrying thing about these statistics is that most respondents who said they hadn’t switched mortgages or haven’t for some time are on a standard variable rate.

“As fixed deals have ended, these borrowers are paying significantly higher interest rates than they could if they were to go out on to the open market.”

Mr Boon said that people are reluctant to switch as they believe it will be more of a hassle than it’s worth, but reputable lenders are incredibly straightforward and changing home loans could save homeowners hundreds of pounds every month.

That said, the coronavirus pandemic appears to be altering how people manage their mortgage repayments, as the idea of paying off loans early is gaining traction.

Should I pay off my mortgage early or invest the cash?

One of the main arguments against paying off a mortgage early is that the returns you’d get from investing the cash significantly outweigh average mortgage interest rates.

That is a fair argument, given that the average mortgage rate on a five-year fixed LTV is 4.32% and the average stock market return over the last ten years is 10%.

However, shaving ten to fifteen years off your mortgage by increasing your payments means that ten to fifteen years later, you can invest what you would have used to pay it off while having peace of mind that your property won’t be repossessed.

Furthermore, as the coronavirus pandemic has made working hours unpredictable and brought about more volatile income, homeowners’ perspectives are changing, and more borrowers are valuing security in 2021.

That said, lenders are trying to be more competitive to accommodate lingering uncertainty. Some banks and building societies offer some of the best lifetime mortgage rates in April 2021, albeit those considering taking this option should be aware of the long-term impact lifetime mortgages could have on their finances.

Mortgage rates dip in April, and some of the best rates are on offer

According to Bankrate’s survey of national lending institutions, the average cost of a 30-year fixed mortgage has declined by 0.1% this week, down from 3.21% to 3.20% in the week ending April 30th.

Rates on a 15-year fixed-rate mortgage have also dipped by the same percentage and currently average at 2.47%.

While mortgage rates are not as competitive as those seen in January, the declining rates are making these loans more attractive.

The independent financial company noted that the latest decline marks the fourth successive week that rates have fallen and while the pandemic continues to threaten much of the world, competitive rates and new incentives should help prop up the property market.

However, lower rates are helping to drive up housing prices, which presents affordability to challenges to prospective homebuyers, particularly first-time buyers.

Although UK Chancellor Rishi Sunak’s stamp duty holiday and the new Help to Buy Scheme is helping first-time buyers and home movers, rising house prices have negated the benefits of the incentives.

However, newly published research by Moneyfacts.co.uk found that mortgage lenders have increased the availability of equity release deals, offering homeowners more options to choose from than ever before.

Nationwide has just launched a cashback offer on mortgages for energy-efficient homes to encourage buyers to purchase properties that hold heat, reduce their energy bills and reduce carbon emissions.

Lenders introducing incentives that better suit borrowers needs

By law, all UK properties must be graded and awarded an Energy Performance Certificate (EPC) before being sold. EPC rates how energy-efficient a property is via a government-approved Standard Assessment Procedure (SAP).

The EPC rating grades a property in bands through A to G, with A being the highest rating, meaning the home is highly efficient and G symbolises least efficient.

According to Nationwide, buyers purchasing homes rated 92 or above on the SAP scale – equivalent to an A on the EPC chart – will GBP 500 cash back, and those buying B-rated properties will receive GBP 250 cashback.

The Saffron Building Society has also launched two new large loan products to entice prospective property buyers.

The self-build loan products will be made available for projects costing anywhere between GBP 1M and GBP 2M in addition to current self-build mortgage products being offered.

One of the self-build mortgage options offers borrowers 65% of the purchase price and 100% of the building costs with a maximum of 75% of the Gross Development Value (GDV).

Saffron Building Society will offer product one at a two-year discounted rate of 4.49%, while the second product, which covers 80% of the purchase price, building costs, and GDV, is being offered at a rate of 4.69%.

As housing priorities have changed amid the COVID-19 pandemic, Saffron hopes that its new self-build mortgages will support clients seeking to build their own homes.