So-called ‘Mortgage prisoners’ in London, trapped on their lender’s Standard Variable Rate (SVR), are being hit with £9,364 in annual interest payments, which is more than a third (37 pct) of the average disposable income in the capital, according to analysis from online mortgage broker Trussle – making it seem to some owners that it’s all about the give.
Mortgage prisoners are borrowers who are trapped on their lender’s Standard Variable Rate (SVR) and unable to switch to a better deal because they fail the stricter borrower affordability rules introduced by the Bank of England in 2014. Stuck on an SVR, these borrowers will almost always be paying a far higher rate of interest than they would be on a competitive deal – the average SVR among the Big Six lenders is currently 3.85 pct, says Trussle.
The vast sum of interest paid by London’s mortgage prisoners would cover a full deposit for a UK property within three years, Trussle says.
It is also more than triple the £3,025 paid by a mortgage prisoner in the northeast, where the annual interest payments equate to 18.7 pct of disposable income. Essentially, Trussle argues, prisoners in London could be losing close to double the proportion of their post-tax income on excess interest each year compared to those in the northeast.
The disparity is the result of the major difference in outstanding loan value between mortgage borrowers from each region. In London, the average borrower has more than £243,200 left to pay on their mortgage, compared to £78,600 in the northeast. Other regions where mortgage prisoners will be hit the hardest include the East and Southeast of the UK.
The £9,364 in annual interest paid by mortgage prisoners in London is £6,591 more than they would pay on the leading two-year fixed rate among the ‘Big Six’ (HSBC’s 1.14 pct). This means that they could free up 26 pct of their disposable income if they switched to this leading deal.
For mortgage prisoners in the northeast, this excess interest figure falls to £2,130, where switching could free up 13.2 pct of the average disposable income of a household in the northeast.
Ishaan Malhi, CEO and founder of Trussle, says: “Many factors are contributing to the troubling number of mortgage prisoners across the UK, and we’re now seeing that geographic location also plays a large factor in how hard you’ll be hit should you end up stuck on your lender’s SVR. For borrowers based in London, the southeast, and east of the UK, the annual interest payments can be absolutely crippling.
“While some lenders do offer help to mortgage prisoners, too many are in effect holding these borrowers to ransom, while they collectively lose around £13 million per day in excess interest. This needs to change urgently. Our recent Mortgage Switch Guarantee proposals call for a new set of industry standards to be implemented to help borrowers on SVRs switch mortgage. One of the key proposals recommends that all lenders have some form of duty-of-care to their customers, possibly in the shape of offering a range of relief options to mortgage prisoners.
“Whether this takes the shape of a payment holiday when it’s clear a borrower can’t afford their payments, or an obligation for lenders to refinance mortgage prisoners who meet certain criteria, it’s clear that addressing this issue is more urgent than ever,” Malhi adds.
To understand where in the UK mortgage prisoners are being hit the hardest, Trussle used data from Savills, showing the average outstanding value of mortgages across UK regions. Trussle then applied interest rates for the average SVR and the leading two-year fixed rate across the UK’s six biggest lenders by market share. This provided a figure for the difference in annual interest payments when moving an average SVR to leading two-year fixed.