With the housing market’s volatility in the last few years, many prospective homeowners, whether using right to buy mortgages to buy their council house or other products to finance their way to a new home, have carefully considered when to get onto the property ladder.
One reason for this apprehension is the risk of becoming a mortgage prisoner, which the Financial Conduct Authority estimates total over 250,000 borrowers could potentially be.
Being a mortgage prisoner can be a particularly precarious situation where it can feel to those affected like there is no way out. But what is a mortgage prisoner, and how do people end up trapped?
A mortgage prisoner is a person trapped in an unfavourable mortgage deal, which can happen for a lot of different reasons.
The most common and tragic of these is a change in the housing market, often caused by a sudden plummet in house prices. This can lead to someone who bought during a relative boom period to suddenly be in negative equity where the house’s value is less than the cost of the mortgage itself.
A common and especially tragic story in 2008 was people getting a mortgage during the housing bubble, their house spirals into negative equity and the introductory deal period runs out, putting the borrower on an unaffordable standard variable rate, causing financial strife and eventually default.
Another reason that this can happen is a change in circumstance that turns a borrower into one that is less desirable and less likely to pass an affordability test.
This has become a problem for people who moved into self-employment over the past few years, given the issues sole traders have with getting a good rate.
Finally, there is the fate of some lenders, which leaves borrowers stranded on a bad rate largely because of the financial collapse of the initial lender, which means there is no chance of remortgaging with the same lender.
