Can Mortgage Prisoners Still Sell Their House?

Being a mortgage prisoner is not a nice situation to be in. Locked into high interest rates and unable to satisfy lenders' requirements for a new deal, many homeowners are now finding themselves trapped in a deal that is simply unaffordable. Unable to secure a new mortgage, selling the current home becomes a challenge. Not only will a new mortgage be hard to come by, but if house prices haven’t risen enough, a sale won’t cover the outstanding balance. That’s not to say it is impossible. Mortgage prisoners can still sell their house. You’ll just need to ensure the mortgage balance is paid in full upon completion. If the property is in negative equity, you may need additional funds to cover any shortfall, and depending on when you sell, early repayment charges may apply.

FCA rules introduced in 2019 enable some mortgage prisoners to switch to newer, more affordable deals, making future purchases and therefore sales much easier. We’ll cover these further down the page.

What is a mortgage prisoner?

A mortgage prisoner is someone trapped in a mortgage deal with high rates and is unable to obtain a new mortgage product elsewhere or with the same lender. As a result, moving house becomes difficult, and the potential for further debt rises. Many mortgage prisoners stem from the 2008 financial crisis. Lending wasn’t quite so tightly controlled, and some lenders offered mortgages without the stringent eligibility criteria we see today. Because many of these lenders collapsed, a significant number of homeowners had their mortgages sold to private equity firms or high street lenders. The private equity firms didn’t have new mortgage products to offer borrowers, leaving them trapped on the same, high-cost deal for many years. It’s not only these unfortunate borrowers who find themselves mortgage prisoners. Thousands of other homeowners are classed as mortgage prisoners.

Changes in affordability

If you have had a change in personal circumstances, perhaps a job loss or an illness, the effect of the cost of living on you may be considerably greater than it was before. This affects your credit rating, which then affects your ability to borrow. A new lender may have specific affordability criteria that you now can’t meet, and you instead find yourself drifting onto your current lender's SVR, which will typically be much higher than the rate you were on before.

You are in negative equity

If your home has fallen into negative equity (where you owe more than the property is now worth), you could find moving onto a new deal difficult. Many lenders won’t allow those with negative equity to move to another deal, instead placing you on their SVR, which is usually more expensive than introductory or fixed-rate deals. When the financial crisis of 2008 happened, many properties lost value, plunging many homeowners into negative equity.

You are retired or will be soon

Many lenders are careful with how much they lend to older or retired homeowners. With potentially less time to pay off the loan, monthly payments are generally higher than they would be for a younger homeowner. This can make payments difficult, especially if relying only on a pension to help.

The property is deemed high risk

Lenders will always assess the risk of their loans. They ultimately want their money back with interest. If your home is in poor condition, is susceptible to flooding or has cladding, for example, it’s much harder to remortgage or sell as buyers won’t be able to get approved for a mortgage.

Luckily, in 2019, the FCA announced new rules making it easier for new lenders to provide mortgages to customers considered mortgage prisoners. It comes with stringent criteria, such as being fully up to date with payments, not looking to borrow more and remaining at the property. Whilst this may limit the sales potential in the short term, it can improve affordability before a later sale.

This severely limits the number of mortgage prisoners eligible for help. However, some people who feel trapped by their mortgage are not mortgage prisoners at all and may have an easier way out than they thought. Below, we’ll run through some of the options that may be available to you.

What options are there for mortgage prisoners?

This depends on whether you are strictly defined as a mortgage prisoner or not. For some mortgage prisoners, there is unfortunately no help. For others, there are options.  Much depends on what type of lender you have and your current circumstances.

Switching to a new lender

As mentioned earlier, FCA changes made it possible for mortgage prisoners to seek out new mortgage products. However, the lender still wields the power as they decide who they can lend to. Those with negative equity, for example, are unlikely to find this a viable option.

Using a modified affordability assessment, the lender bypasses some of the more stringent checks and considers your mortgage payment history, not your income and monthly spending. In addition, lenders will have specific criteria in place, which may include:

• You are up to date with your mortgage and have been for the past year.
• You do not need to borrow more.
• The LTV will not exceed 75%.
• You have at least 5 years remaining on the current mortgage
• There is at least £50,000 outstanding on the mortgage.

These vary per lender, so you should check before attempting to switch to a new mortgage product.

Get a product transfer

A product transfer is when you remortgage with your current lender.  If you have remained up to date with payments, won’t be borrowing any extra and keep the mortgage for the same property, you may be able to switch to one of their new cheaper products.

Switch to a new lender within the same group as your existing lender

Many mortgage prisoners are those who took mortgages with lenders that are now inactive. These “closed book” mortgages were taken on by high street banks or private equity firms, often locking people into expensive deals. If the group that manages your mortgage has active lenders within it offering cheaper mortgages, you may be able to switch. This can be tricky. Knowing whether your current lender is part of a large group isn’t always obvious. As a result, speak to a broker or financial advisor for guidance.

What should I do if I am a mortgage prisoner?

Firstly, speak to a mortgage broker for some expert and impartial advice. This will help you understand whether you are likely to be eligible to change mortgage products. After taking their advice, if the option seems favourable, and the mortgage doesn’t restrict you, you could consider selling your house fast. At Bettermove, we buy any property in any location and typically do so within thirty days. This allows you to downsize if necessary and perhaps borrow less for the new home, making overall affordability much easier. Speak to our team if you’d like to know more.