The Intermediary – August 2025 - Flipbook - Page 12
RESIDENTIAL
Opinion
Mortgage prisoners
are alive if not well
T
housands of borrowers
are still trapped on skyhigh standard variable
rates (SVRs) in closed
mortgage books, many
of which are held by
investors outside of the UK.
The story of their plight has been
in and out of the news for almost
18 years, following the 2007 Credit
Crunch and 2008 financial crash.
While their numbers have dwindled
since then as loans redeem or homes
are repossessed, it’s estimated there
are still around 47,000 mortgage
prisoners unable to refinance onto a
new contract with an active lender.
This contingent of borrowers are
those who took out mortgages at up
to 125% loan-to-value (LTV), who
self-certified their incomes and took
interest-only loans and have no means
to repay the outstanding balance.
While borrowers in this position
with an active mortgage lender can
move to a more affordable rate under
Financial Conduct Authority (FCA)
rules, those in closed books held by
investors that lack the permissions
to originate mortgage contracts are
stuck. Oen, they’re paying standard
variable rates up to 15% – which is,
frankly, scandalous when the UK base
rate is 4%.
You’d think this is a clear breach of
the Consumer Duty rules. These are
vulnerable borrowers. The outcomes
they face are entirely predictable
to most reasonable people – and
they’re not good. The products are
outrageously priced, the value is
abysmal, even detrimental, and the
support these borrowers are given
is being told, for the most part,
tough luck.
The kicker is that the FCA can do
nothing about it where the investors
operate outside their purview. US
pension funds, insurance companies,
private equity funds – they are free
to ignore the Consumer Duty to their
hearts’ content.
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The Intermediary | August 2025
This leaves the UK market with a
conundrum, however. The borrowers
are in the UK and ought to be protected
by UK law. They are not.
Contractually, bondholders who
have invested in securitised UK
mortgages must appoint a fully
regulated third-party administrator
or servicer – and they are on the hook
with the FCA.
This is causing an almighty
scrum in the market – investors care
about their returns. Legal contracts
that govern securitised assets and
the returns promised therein are
extremely difficult to alter years
down the line. The only player in the
chain with a reason to care about this
conflict is the administrator.
To complicate maers further, some
administrators hold permissions to
originate new mortgage contracts
– something that is required to
take a mortgage prisoner off SVR
and onto a new fixed rate. Other
administrators do not.
There’s a ruckus over whether
origination permissions make the
servicer a ‘co-manufacturer’ of
mortgage contracts. The majority of
servicers want absolutely nothing to
do with this responsibility. Legally,
this side argues, they have no role in
seing the criteria or pricing of that
loan and are simply carrying out the
contract’s obligations on behalf of
the investor.
The other side takes a contrary
view – they’re the only ones with the
power to apply the Consumer Duty
rules for borrowers trapped in these
mortgage books. If they do not take
responsibility, who will?
Waiting game
We’re at an absolute stalemate at the
moment – and it doesn’t look like
things are going to resolve any time
soon. In a review of the number
of people affected in 2021, the FCA
estimated that there were 195,000
mortgages held in closed mortgage
SARAH DAVIDSON
is head of research at WPB
books with inactive lenders – 2.3%
of the total number of residential
mortgages.
In 2019, it estimated that there were
250,000. The longer this goes on, the
more of these mortgages are repaid
– at however extortionate a rate – or
properties repossessed and sold. The
theory is that eventually securities
will redeem, and the problem will
have gone by default.
Except there’s a really big fly in this
ointment: there’s more than one kind
of mortgage prisoner.
First you have the credit and/or
affordability prisoners whose financial
circumstances, credit rating, loan-toincome (LTI) ratio, age or repayment
strategy renders them unable to
remortgage.
Then you’ve got the property
prisoners, where cladding, fire safety,
energy efficiency and flood risk
make the property unmortgageable.
Finally, the contract prisoners, those
unfortunates who bought leaseholds
with onerous service charges and
doubling ground rents.
Many thousands of these mortgages
have also been securitised or sold as a
whole loan book to investors outside of
the FCA’s jurisdiction. Sorry folks, but
this isn’t a problem that is going away
for many decades to come.
There is no easy answer to this – it’s
a nightmare scenario where everybody
and nobody is right and wrong.
Expect the plight of these borrowers
to come sharply into focus if interest
rates move against them. ●
