regulatory changes and low credit scores have left thousands trapped in a cycle of high payments

There are 8.5 million households in the UK who own a home with a residential mortgage, often with fixed interest rates from two to five years. Usually, when that mortgage deal ends, the borrower will move to another deal from the same or a different lender.

But not everyone can do this. Changes in regulatory measures after the 2008 financial crisis have left tens of thousands of borrowers in the UK trapped in unfavourable mortgages with higher rates. My research looks at the lives of these “mortgage prisoners” – specifically, how low credit scores have left them in a cycle of high payments with no way out.

This issue originated from the global financial crisis. Successive governments implemented regulatory measures to address riskier mortgage lending practices dating back to the early 2000s, such as high loan-to-value and interest-only mortgages.

The UK government nationalised mortgage portfolios held by collapsed lenders such as Northern Rock. It later sold these portfolios to inactive lenders and investors
who do not offer new mortgages. This had unintended consequences for many people, whose mortgages are now held by these inactive firms.

At the same time, lenders became more risk averse, removing high loan-to-value mortgages and requiring credible repayment plans for interest-only mortgages. In 2014, the UK government and the EU introduced new regulatory restrictions on lending, including affordability assessments to ensure that new borrowers could afford their mortgages should interest rates increase.

This inadvertently created a new category of existing borrowers who had obtained mortgages in the early 2000s but now did not meet these new conditions. Ever since, active lenders have been reluctant to take on these borrowers because of the risk involved. Even some of those who had their mortgages with active lenders have been unable to switch to a better rate.

The Financial Conduct Authority (FCA) estimates that 167,000 people in the UK are trapped in mortgages with inactive firms. But it only counts them as mortgage prisoners if they are up to date with payments but unable to switch due to high loan-to-value ratios or low credit scores – about 51,000 people. The regulator discounts those in arrears, citing missed payments as the reason they cannot switch, rather than regulatory changes.

But, as I have found in my research, many people have fallen into arrears precisely because they have been unable to switch.

Mortgage prisoners in the UK

I conducted in-depth interviews with 28 mortgage prisoners about their plight. Stemming from a crisis 16 years ago, their predicament has loomed large over much of their working lives.

Most of the people I interviewed had opted for interest-only mortgages pre-2008 as a temporary measure while navigating significant life changes, like starting families or new jobs.

However, they became caught in the cycle of factors triggered by the global financial crisis. This hindered their capacity to remortgage, and caused their interest rates to skyrocket in comparison to other homeowners. Some stopped pension contributions or took on part-time work alongside full-time employment to meet their inflated payments. Despite sacrificing family time and retirement security, a quarter of interviewees still fell into payment arrears.

The interest rate hikes by the Bank of England over the last few years have exacerbated this. As most mortgage prisoners are on variable rates, they were immediately exposed to these – most now pay interest rates above 7%. Their payments escalated rapidly, leading some who were previously managing to fall into arrears. Over half now have low credit scores, locking them into their mortgages.

One interviewee, Diane*, said her mortgage was the “bane of her life”, leading to harmful mental and physical effects. Another interviewee, Helen, captures the feelings of many: “Never being able to escape from that original loan has had a snowball effect on everything.”

Higher interest rates can lead to missed payments.
Stephen Barnes/Shutterstock

Most interviewees were acutely aware of how credit scores limit their options. Based on borrowers’ payment histories and public data, these scores affect mortgage access, terms and interest rates. Higher scores enable people to access bigger loans at lower rates, reinforcing longstanding inequalities in housing that originate elsewhere in society.

My interviewees understood that a missed mortgage payment would lower their credit score and might even lead to the loss of their home. Helen described it as “an axe hanging over you”. Another interviewee, Lisa, tried on several occasions to remortgage because she desperately wanted to move for the sake of her son. She recognised her inability to do so was “absolutely down” to her credit score, and described this as “soul destroying”.

Nearly all made a concerted effort to improve their credit score. But some found it difficult to erase the blemishes that influence their scores, feeling a sense of hopelessness. One interviewee’s monthly payment doubled to £1,800 due to rate hikes, making arrears inevitable:

My whole focus on my credit file was to repair any damage that had been caused, so that I could remortgage … I feel now, it’s hopeless. I have no way of getting out of this … My credit score has defeated me.

The FCA’s definition of mortgage prisoners, which excludes those in arrears, overlooks the conditions contributing to this situation. This might explain why neither it nor the UK government have yet moved forward with proposed solutions, such as government equity loans to these mortgage prisoners and a fallback government guarantee for new mortgages.

These mistakes are not the interviewees’ own. They are outcomes of regulatory changes that were unforeseeable at the time they took out their mortgage. And with the recent interest rates hikes and cost of living crisis, the number of homeowners who become mortgage prisoners will swell.

*All names have been changed to protect the anonymity of interviewees.

by : Matthew Sparkes, Assistant Professor in Sociology, University of Cambridge

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