Mortgage prisoners and modified affordability

A mortgage prisoner is someone who cannot switch their mortgage to a better deal, even though they are up to date with their payments¹. Most have a mortgage sitting in the "closed book" of an inactive firm: a lender that no longer offers new mortgages or new rate products to its existing borrowers¹. Because there is nothing to switch to within the lender, and other lenders will not take them, these borrowers are typically stuck paying their lender's standard variable rate (SVR), which tends to be significantly higher than the rates on other types of mortgage³.

The numbers depend on who is counting and when. The Financial Conduct Authority (FCA) estimated there were 140,000 mortgage prisoners in 2016⁴. A 2021 review identified 195,000 mortgage accounts with closed book lenders where borrowers could potentially benefit by moving to an active lender, but under the FCA's own definition only 47,000 of these were mortgage prisoners: up to date with payments, unable to switch, and likely to benefit if a lender would take them¹.

What a mortgage prisoner is

The phrase "mortgage prisoner" is not a legal status. It is the label used, including in Parliament and by the regulator, for people who are unable to switch mortgages to a better deal, even if they are up to date with their payments¹. The defining feature is that the barrier is structural, not personal: the borrower has not fallen behind, but no lender will offer them a new deal.

Most mortgage prisoners have a mortgage in a closed book of an inactive firm¹. A closed book means the lender does not offer new mortgages or new interest rate products to existing borrowers⁶. Most have mortgages with inactive lenders who do not provide new mortgage products at all². The borrower keeps paying, the lender keeps collecting, but there is no product range to move onto and no internal switching to be done.

A smaller group are prisoners for a different reason: their lender is active, but they fail the affordability tests that new lending requires. The FCA's 2021 review described mortgage prisoners as people who are unable to switch to a new mortgage deal despite being up to date with payments, and who could benefit from switching if they met a lender's risk appetite⁵. In 2018 a review put the total unable to switch at 150,000, of which 140,000 were with inactive lenders and 10,000 with active lenders⁷.

It is worth being precise about what the term does not cover. Someone who simply has not got around to remortgaging, or who has missed payments and been refused a new deal on that basis, is in a different position. The mortgage prisoner problem is specifically about borrowers who are paying as agreed and still cannot move.

How borrowers became trapped after the financial crisis

The origin of the problem lies in changes to lending practices during, and immediately after, the 2008 financial crisis². Before the crisis, mortgages were often granted on terms that later rules would not permit: interest-only arrangements, high multiples of income, or lending that assumed future income growth. When the crisis hit, many lenders stopped writing new business entirely. Their loan books were sold on to firms that collect payments but do not lend, and the original borrowers were left with nowhere to go.

For most, though, the trap tightened because of changes in affordability rules following the financial crisis⁴. The FCA's rulebook now requires that, before entering into or agreeing to vary a regulated mortgage contract, a firm must assess whether the customer will be able to pay the sums due, and must not enter into the transaction unless it can demonstrate the contract is affordable⁸. A borrower who took out a mortgage under the old rules may fail that test today, even though they have kept up every payment since.

Research by the Resolution Foundation in 2014 warned of the scale of the risk: one in ten of the day's mortgagors risked being imprisoned by borrowing deals likely to make their repayments unaffordable as interest rates rose⁹. The same research put around 770,000 households at risk of being mortgage prisoners, with a limited ability to switch to better deals and so protect themselves against rate rises⁹.

The sequence matters for understanding why the problem persists. Each step was reasonable in isolation: lenders retrenched after the crisis, and affordability rules were tightened to prevent a repeat of it. The combination, though, left a group of borrowers who pass every test of being a good customer, except the one test that governs access to a new mortgage.

Closed books and inactive lenders: why switching is blocked

Switching is blocked at both ends. At the lender's end, a closed book means there are no new products to switch to⁶. At the market's end, a new lender will apply its current affordability criteria, which the borrower may fail because their mortgage was granted under older rules⁴. The FCA's mortgage market study found that some borrowers face barriers to switching and are paying more than they need to, despite some being up to date on their mortgage payments; these borrowers have often been referred to as mortgage prisoners¹¹.

There is no obligation on lenders to offer better deals to mortgage prisoners trapped on high standard variable rates¹². The offer of a better deal to new customer mortgage prisoners is purely dependent on the commercial risk appetite of the lender¹². An inactive lender has no risk appetite for new lending at all, because it is not in the business of lending.

Closed books are not the only route into this position. Other circumstances can block switching for similar reasons:

• Victim-survivors of economic abuse can be locked out of affordable mortgage rates, unable to access a mortgage at all, trapped in an unaffordable mortgage, or have difficulties switching mortgages¹³.
• A fraud marker can mean a mortgage application is rejected, and the customer may find they cannot open a bank account or that their existing account is closed¹⁴.
• Leaseholders of flats in buildings affected by building safety problems face potential difficulty remortgaging, moving, or buying additional shares in their home, because of reduced lender appetite to provide mortgage finance against flats in affected buildings¹⁵.
• After separation, even if both former partners agree, or a court orders one person to take over the mortgage, the lender is not obliged to release the other person from it and can refuse based on its own affordability criteria¹⁶.

The common thread is that the decision rests with the lender, not the borrower. A borrower who is up to date with payments can still be refused, and there is no rule that forces any lender, active or inactive, to take them.

How many people are affected: estimates from 47,000 to 140,000

The honest answer is that nobody knows precisely, and the figures differ because the definitions differ. The FCA estimated there were 140,000 mortgage prisoners in 2016⁴. A 2018 response to the FCA's mortgage market study put 150,000 mortgage prisoners in total as unable to switch mortgage product due to affordability requirements introduced after the crisis, of which 140,000 were with inactive lenders and 10,000 with active lenders⁷.

The FCA's Mortgage Prisoner Review identified 195,000 mortgage accounts with closed book lenders where the borrowers could potentially benefit by moving to an active lender². Out of these, the FCA identified a cohort of 47,000 mortgage prisoners who are up to date with mortgage payments but cannot readily switch providers². The government's 2021 policy statement gives the same figure: 47,000 mortgage prisoners who are unable to switch to a new mortgage deal, despite being up to date with payments⁵. According to the FCA's definition, only 47,000 of the 195,000 closed book accounts counted as mortgage prisoners¹.

Researchers have flagged the data problem directly: an LSE London report noted it was difficult to find reliable data on how many mortgage prisoners there are and the rates they are paying¹⁷. The Resolution Foundation's earlier work used a broader, forward-looking definition, putting around 770,000 households at risk of being mortgage prisoners and of having repayments eating up at least a third of their disposable income⁹, and describing 770,000, a third of the highly geared households it identified, as facing both unaffordable repayments and an inability to switch¹⁸.

In practice, the figure to treat as the core estimate is the FCA's 47,000 from 2021⁵, because it is the narrowest and most recent official count, built from actual mortgage account data rather than modelling. The larger figures are real too, but they describe wider groups: everyone in a closed book who might benefit from moving, or everyone the rules block from switching, including those with arrears.

Standard variable rate: what trapped borrowers pay

A standard variable rate (SVR) mortgage is what you are usually transferred onto when a fixed, tracker or discount deal comes to an end³. It is also known as a reversion-rate mortgage³. With a variable rate mortgage, you pay your mortgage provider's SVR⁶, and as the name suggests, your payments can go up or down²⁰.

The SVR is set by the lender, not by any external benchmark. Lenders set their own rates, so they are not all the same²⁰. The rates do not have to follow changes in the base rate set by the Bank of England, but they are often influenced by it²⁰. The Bank of England makes the same point about variable rates generally: a variable rate can change at any point, typically reflecting a change in the Bank's base rate²¹. The base rate is only one of several factors a lender takes into account when setting its SVR, including its own cost of borrowing, risk management and internal targets³.

For mortgage prisoners, the SVR is where they are held. Research from 2015 described them as left trapped on their existing provider's standard variable rate¹⁰, and the Resolution Foundation noted that members of this group may have no option but to stick with their lender's standard variable rate when renegotiation of terms is not possible¹⁸. The same applies to borrowers whose mortgage deal expires while they are on a debt management plan: the current lender will usually offer its standard variable rate²².

One small mercy is flexibility. SVR mortgages tend not to have an early repayment charge, providing the flexibility to pay off the mortgage quicker or move it without a penalty³. That is a real difference from fixed rate mortgages, where most deals allow overpayments of up to 10% of the balance each year and may charge an early repayment charge beyond that²³.

Why the SVR usually costs more than a new deal

The standard variable rate will usually be much higher than an introductory rate on a new deal²⁴. Standard variable rates tend to be significantly higher than the rates on other types of mortgage³, and the interest rates are often higher for SVRs than for other types of mortgage²⁰. At the end of a fixed period, you need to remortgage; if you do not, you are moved to your lender's SVR, which is usually much more expensive²⁵.

The reason is structural. Introductory rates are priced to win business, and lenders are willing to shave their margins to attract new customers. The SVR is the rate a lender charges when it does not have to compete for the borrower, and mortgage prisoners are the extreme case: a borrower who cannot leave has nowhere to take their business, so the lender faces no competitive pressure on the rate at all. This is why the FCA found these borrowers are paying more than they need to¹¹, and why the Resolution Foundation argued there is a need to free mortgage prisoners where possible and protect them from the risk of unreasonable rate increases⁹.

The cost is not hypothetical. When the Bank of England cut Bank Rate in 2020, UK Finance estimated that borrowers on a variable or tracker rate would on average save between £25 and £40 a month on their monthly mortgage payment²⁶. That figure shows how directly variable rate payments track the rate a lender passes on, and the same mechanism works in reverse when rates rise: a borrower stuck on an SVR absorbs every increase the lender chooses to pass on, with no deal to cap it.

Modified affordability: how lenders can assess mortgage prisoners

The FCA's response was to create a modified affordability assessment: a way for lenders to approve a switch for a mortgage prisoner without running the full affordability test that is blocking them. The eligibility test is simple to state: the borrower is up to date with their mortgage payments⁴.

The underlying rules explain what is being modified. The FCA's rulebook requires that, before entering into, or agreeing to vary, a regulated mortgage contract, a firm must assess whether the customer and any guarantor will be able to pay the sums due, and must not enter into the transaction unless it can demonstrate the contract is affordable⁸. The general rule is that a firm must assess affordability on the basis of both repayment of capital and payment of interest over the term²⁷. There is a specific exception for interest-only lending: where a mortgage lender is lending under an interest-only mortgage in accordance with MCOB 11.6.41R(1), it may assess affordability on the basis of payment of interest only over the term, plus repayment of such capital as may be due to be repaid over the term²⁸.

The modified assessment works on similar logic: if a borrower is already meeting the payments on their existing mortgage, and the new deal does not increase what they owe, a full re-test of income and outgoings adds nothing but a barrier. The FCA's mortgage market study had found that some borrowers face barriers to switching and are paying more than they need to, despite some being up-to-date on their mortgage payments¹¹, and the modified rules were designed to remove that barrier for the narrow cohort it fits.

The limits of the modified assessment matter just as much as the rule itself:

• It only helps borrowers who are up to date with payments⁴. StepChange has pointed out that its clients with mortgage arrears remain ineligible to move to a more affordable deal, either with their current lender or another provider, under the "up to date with payments over the previous 12 months" condition¹².
• It does not oblige any lender to participate. There is no obligation on lenders to offer better deals to mortgage prisoners, and the offer of a better deal is purely dependent on the commercial risk appetite of the lender¹².
• It does not apply to borrowing more. Where a change involves extra risk, such as a permanent conversion to interest-only or extending the term beyond the borrower's expected retirement date, affordability will need to be checked²⁹.

Separately, the Mortgage Charter gives up-to-date customers a right of sorts at their existing lender: customers who are up to date with payments can switch to a new mortgage deal with their lender at the end of their existing fixed-rate agreement without a new affordability check³⁰. That helps borrowers with active lenders, but not those in closed books, where no new deal exists to switch to.

Your options if you cannot switch

If a full switch is out of reach, the options are about managing the mortgage you have. The first is simply to ask the lender what it can offer. Even inactive lenders can sometimes vary terms, and the Mortgage Charter commitments on temporary payment changes apply across the market²⁹. Under the charter, affordability will need to be checked if you wish to permanently convert to an interest-only mortgage, or where the term is proposed to be extended beyond your expected retirement date²⁹, but temporary measures sit outside that.

If payments have become difficult, the options a lender may discuss include moving to an interest-only loan, taking a mortgage payment holiday, or extending the term of the mortgage³¹. Each has a trade-off. Switching to interest-only is not a long-term solution: you only pay the interest, and you must pay the capital before the end of the term³². Extending the term lowers the monthly payment but increases the total interest paid over the life of the loan.

Because SVR mortgages tend not to have an early repayment charge³, overpaying is often available as a way to cut the cost of an expensive rate. Most fixed rate mortgages allow overpayments of up to 10% of the balance each year before an early repayment charge may apply²³, but on an SVR the flexibility is usually greater. Whether overpaying beats saving the money elsewhere depends on your circumstances; the comparison is set out on overpaying the loan or saving the money instead.

Beyond the lender, there are structural options in some parts of the UK. In Scotland, the Mortgage to Rent scheme is open to borrowers who have failed to reach agreement with their lender on how to manage their arrears, or who have had a trustee appointed to their estate with the trustee looking to force the sale of the property³³. Proposals have also been made for a mortgage rescue scheme under which mortgage prisoners who can no longer afford their payments could stay in their homes as tenants, with housing associations buying their properties¹⁷.

Related guides that cover the mechanics of each route: remortgaging, product transfers, extending your mortgage term, interest-only mortgages, mortgage arrears and specialist mortgage lenders.

Where to get help as a mortgage prisoner

Free, impartial debt advice is the right starting point, and it does not commit you to anything. StepChange, a debt advice charity, publishes guidance for borrowers whose mortgage term is ending²⁰ and for those facing arrears³², and its policy work on mortgage prisoners sets out the rules in plain terms¹². MoneyHelper, the government-backed money guidance service, covers what happens to a mortgage on separation, including the lender's discretion over releasing a partner¹⁶.

If you have complained about how your lender has treated you and the complaint is unresolved, the Financial Ombudsman Service can look at it, including complaints about the interest rates applied to mortgages⁶. The ombudsman's own guidance notes that some lenders do not offer new mortgages or new interest rate products to existing borrowers, which is called a closed book⁶, so it is a body familiar with the situation mortgage prisoners are in.

Where the mortgage cannot be saved, the options narrow to housing ones. In Scotland, the Mortgage to Rent scheme and the Mortgage to Shared Equity scheme exist for borrowers at risk of losing their home³³, covered in more detail on the Home Owners' Support Fund in Scotland and Mortgage to Rent. Elsewhere, the sequence of repossession, and what a lender must do before going to court, is covered on mortgage arrears, pre-action rules and repossession in England and Wales.

The Resolution Foundation's conclusion from its work on mortgage prisoners is worth holding onto: there is a need to make efforts to free mortgage prisoners where possible and protect them from the risk of unreasonable rate increases where necessary⁹. Until that happens at scale, the practical route for an individual borrower is advice first, then the lender, then the ombudsman if something has gone wrong.