A group representing consumers is warning that rules must be changed to stop many homeowners becoming 'mortgage prisoners'.
There are fears that many people could find themselves trapped in their existing mortgage agreement as a result of a high loan-to-value negative equity, inability to exit a fixed term deal or by the severe contraction in the interest only market.
A number of providers such as Lloyds TSB and The Co-operative Bank have increased their standard variable rates recently, while others – including Royal Bank of Scotland and Leeds Building Sociality – have tightened up their interest only requirements.
It means that a homeowner who would previously have been eligible for an interest only mortgage would now not be granted one, leaving a capital repayment option as their only choice.
The Financial Services Consumer Panel (FSCP) has said that ahead of changes to mortgage rules under the Mortgage Market Review (MMR), the regulator should allow providers to treat affected homeowners more leniently when they are applying for a new mortgage.
Its proposals would mean a definition for a 'mortgage prisoner' would be created, meaning providers could clearly identify who they could relax the new rules for.
Adam Phillips, chair of the Consumer Panel, said: "We remain extremely concerned that many people, in particular those affected by the recent rises in lenders' SVRs, will find the increase in their monthly mortgage repayments financially challenging," he added.
"These increases are inconsistent with the principle of Treating Customers Fairly and could be addressed if the FSA were to consider introducing a new rule as we suggest.
"Otherwise significant numbers of consumers stand to suffer detriment."
The group has also called for the FSA to delay its new mortgage rules unless it has 'solid empirical evidence that consumers would not be harmed by prompt implementation'.
"The new responsible lending requirements for the whole market should not be brought into effect until the housing market has demonstrably recovered," added the FSCP.
"The potential for the MMR's proposals further to restrain lending at a time when underwriting standards are already tight would be detrimental to consumers."
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