by Mark Johnston
What is a Mortgage Prisoner?
Research has shown that Mortgage lending reached reckless levels during the last housing boom, and helped to push up property prices. Some lenders handed out mortgages with only cursory checks on borrowers’ real ability to repay.
The Financial Service Authority (FSA) has estimated that as a result of lenders tightening their borrowing criteria, up to 45 per cent of borrowers who had taken out a deal since 2005 could be mortgage prisoners.
The regulator believes that as many as 55 per cent of all mortgage borrowers are ‘mortgage prisoners’, meaning they are unable to remortgage or move house as they can not meet the stricter lending criteria lenders have implemented since the credit crunch.
Some recent data has revealed that roughly half of them were thought to be trapped due to their credit problems and the other half because interest only and low deposit deals had become more restricted.
Hundreds of thousands of homeowners are now being described as “mortgage prisoners. Only when they start to consider moving home or reviewing their finances will their internment become evident.
Many experts previously warned that a “ticking time bomb” has been created over the last 20 years, with an estimated 1.5 million interest only loans worth around £120 billion due for repayment in the next decade.
Five reason that borrowers are now mortgage prisoners are:
They have an interest only loan: A few years ago almost any lender would let you take out a mortgage on the basis you would pay off the interest each month, but only repay the original loan at the end of the 25-year term. They would ask that you had a plan to repay that debt but tended not to make checks.
They have aged: Obviously this has happened to everyone, but at the same time lenders have changed maximum age limits. “A number of lenders will not lend to borrowers past retirement age.
A borrwers house is worth less than when they bought it: Figures from Nationwide building society suggest that in many areas of the UK prices remain well below the peak they hit in 2007. therefore meaning that some owners could have a property worth less than they paid for it.
People borrowed most of the cost of their house: A few years ago it was possible to borrow 125 per cent of the value of the property on a mortgage, not many did, but it was not uncommon. This therefore put them in the same position as people who have seen the value of their home fall.
Borrowers are self-employed: If they have recently changed jobs or become self-employed borrowers may not have all the paperwork needed to get a loan. It used to be much easier.
Which? chief executive Peter Vicary-Smith said it was “disgraceful” that so many people were encouraged to borrow more than they could afford.
In conclusion it appears that the housing market is failing not just one but two generations of consumers, with many mortgage prisoners trapped with their current lender and young people excluded from the housing market altogether.
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