'Mortgage prisoners': are borrowers being unfairly held on expensive loans?

The Financial Conduct Authority has launched a formal investigation into claims banks are over-interpreting tough new mortgage affordability rules to unfairly hold borrowers on more expensive loans.

In April last year the Mortgage Market Review came into force. Among other things, the new rules were introduced to prevent a repeat of the risky lending practices seen prior to the financial crisis. The regulations require lenders to undertake thorough affordability tests, including examining would-be borrowers' expenditure, "stress-testing" future interest rates hikes and scrutinising repayment plans for interest-only loans or for those planning to borrow into retirement.

There have been complaints from prospective buyers who feel the new tests can be too onerous, but a particular issue highlighted a number of times has been that of so-called "mortgage prisoners". These are people who already have a mortgage and are looking to port their loan to buy a new property, or to remortgage onto a better rate, but who are unable to do so because they are falling foul of the new assessments.

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In some cases, described as "lunacy" and "perverse" in the Daily Telegraph, lenders are turning down new loans for those downsizing or seeking to move to a new mortgage, even where the application would result in lower costs. In effect, the paper notes, banks are saying they cannot afford to pay less.

Even where this is correct under the strict interpretation of the new tests, it ignores "transitional arrangements" put in place by the regulator. Under these exemptions, anyone who is porting or reducing their loan does not need to be subjected to the new tests.

Why are lenders thought to be ignoring this option? Commentators have speculated it is simply an attempt to keep borrowers "paying a higher rate", especially at a time when competition for new business has left rates on new offerings at record lows.

The Daily Mail says the FCA has called for evidence on homeowners being "unfairly trapped" by their mortgages "to ascertain how prevalent this problem is". It will also look into "whether lenders have deliberately tried to confuse customers with complicated terms". Submissions are open until December.