How the Coronavirus pandemic is impacting mortgage prisoners

With the Coronavirus pandemic having an unprecedented impact on the economy, many mortgage prisoners could be finding themselves facing huge financial challenges. To help those trapped in a mortgage, we’ve looked at what is being done to help mortgage prisoners and what they can do if they are struggling due to the Coronavirus pandemic.

Although a mortgage prisoner is anyone trapped on a mortgage deal with their current provider, when looking at how the pandemic has impacted mortgage prisoners, we’ve predominately focused on those trapped into interest-only mortgages. Many of these mortgage prisoners took out interest-only deals during the housing boom back before the 2008 financial crisis and became trapped into their mortgage when the housing market crashed and some mortgage lenders, such as Northern Rock, collapsed resulting in the mortgage book being sold to firms that are not authorised by the Financial Conduct Authority to perform a remortgage.

Many mortgage prisoners found themselves in the situation where they were trapped in an interest-only mortgage as they were unable to afford the higher costs of a new repayment mortgage. To help these mortgage prisoners, last year the Financial Conduct Authority (FCA) relaxed some affordability checks to make it easier for mortgage prisoners to switch to new lenders.

The FCA required firms to write to mortgage prisoners who may be eligible to switch mortgages to let them know this option is available. Originally, firms had until September to inform mortgage prisoners of their options, however, due to the Coronavirus pandemic resulting in mortgage lenders withdrawing deals from the market, the FCA recognised that lenders may not be in a position to currently offer mortgage prisoners new deals. As such, the deadline for writing to mortgage prisoners was extended by three months in May, with firms now having to write to mortgage prisoners by 1 December 2020.

Mortgage prisoners do not have to wait until they receive a letter from their lender to look for a new deal. As Covid-19 restrictions are being relaxed, the housing market is starting to move again, and mortgage lenders are beginning to reintroduce deals. While initially it looked positive for mortgage borrowers, in the last week some lenders have once again withdrawn high loan-to-value deals. This could be because in general banks and lenders are more risk-averse at the moment, waiting to see what the results of the Coronavirus pandemic will be on the economy before taking on risker borrowing. For mortgage prisoners, this could make it more difficult to switch mortgage deals.

Meanwhile, there was some hope for mortgage prisoners as the FCA has worked towards encouraging lenders to pass on base rate cuts to mortgage prisoners, which may have resulted in some mortgage prisoner repayments falling.

Mortgage prisoners who have been financially impacted by the Coronavirus pandemic can apply for a repayment holiday as a standard mortgage borrower is able to. Last month, the Government and the FCA extended the repayment holiday scheme so that applications can be made until the 31 October 2020. Mortgage prisoners should be aware that interest on their mortgage repayments will continue to mount up during the repayment holiday and, as such, once the repayment holiday comes to an end they could see their repayments increase.

For mortgage prisoners who are struggling financially, for example those facing the prospect of redundancy once the furlough scheme comes to an end, they should speak to their mortgage lender to discuss their options. In reality, there may be fewer options available to mortgage prisoners, but they can work with their mortgage lenders at ways in which to reduce their monthly repayments. Alternatively, mortgage prisoners can speak to Citizen’s Advice for advice and guidance about what options are available to them.