LSE: Costed solutions to potentially free 200,000 mortgage prisoners proposed in LSE London report
Costed solutions to the situation facing mortgage prisoners have been put forward in a new report by LSE London.
The report Releasing the mortgage prisoners: proposed solutions and illustrative costings is the third in the series, funded by a total private donation by Martin Lewis, and commissioned by MoneySavingExpert (MSE).
The report is being shared with the Treasury and the Financial Conduct Authority.
It outlines that:
Mortgage prisoners have been trapped on high rates since the 2008 financial crisis. Many have loans that were sold by the state to ‘closed book’ inactive lenders – largely investment companies that are not regulated to lend new mortgages – making it difficult for them to move to cheaper rates.
This final LSE London report includes, for the first time, indicative costings requested by the government. Chief Secretary to the Treasury John Glen MP committed to reviewing solutions put forward in the report, telling Martin Lewis that proposals would be given “full consideration” as long as they met his three criteria: delivering value for money; fair use of taxpayer spending; and addressing risks of moral hazard.
Prisoners have suffered financially, mentally, and physically for more than a decade. The horror of being unable to escape unaffordable mortgages has had a devastating impact on many. In the past year, near-monthly rate rises have seen some prisoners’ rates leap from 4.5 per cent to as much as 8.29 per cent.
The government has made £2.4bn from the sale of these loans. Not only has it made back the cost of managing the sales, the LSE London report finds evidence that it has generated a £2.4bn surplus. In 2009, the government acknowledged that selling these mortgages to inactive lenders had the potential to severely harm consumers, but didn’t take action to prevent this.
The LSE London report proposes solutions that would help prisoners eventually remortgage with active lenders, including:
Free comprehensive financial advice for all prisoners (required for any borrower who might go on to access other solutions).
Interest-free equity loans to clear the unsecured element of Northern Rock’s ‘Together’ loans.
Government equity loans on the model of Help to Buy, interest-free for the first five years.
A fallback option: a government guarantee for active lenders to offer prisoners new mortgages.
The LSE London report estimates these solutions could cost between £50m and £348m over 10 years depending on take-up. While the overall outlay would be £370m to £2.7bn, this is reduced to £50m to £347m net, as the government would hold some equity loans itself.
Kath Scanlon, Distinguished Policy Fellow at LSE London and lead author of the report, said: “Since our research began in late 2019, the situation facing mortgage prisoners has become dramatically more difficult. Rises in interest rates and the cost of living pressures occasioned by the conflict in Ukraine have made it more urgent to address the issue. We hope that our report contributes to finding real solutions.”
Martin Lewis, who funded the report and is the founder of MoneySavingExpert, said:“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations.
“When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed. The government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers.
“I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”
Rachel Neale, from the UK Mortgage Prisoners group, which campaigns for victims of this mortgage scandal, said:“We thank Martin Lewis for the funding of this report. It reveals that Treasury made £2.4bn surplus out of the sale of our mortgages, whilst mortgage prisoners continue to be profiteered from. The report also confirms what UK Mortgage Prisoners has always known, that harm and detriment to borrowers caused by the sale of these mortgages was disregarded by government as far back as 2009 when it opted not to act to protect borrowers.
“The severe harm already endured for over a decade, compounded now by 10 consecutive rate rises, means time is not a currency mortgage prisoners have. The proposed solutions need to be considered in detail, and urgent action is required now before more homes and lives are lost.”
The LSE London report’s proposals in more detail
The LSE London report – Releasing the Mortgage Prisoners– includes a structured set of solutions that could be used to free mortgage prisoners. A full policy assessment, which only the Treasury has the data to do, would also have to calculate expected benefits. The proposals are based on significant research, but there are other potential policies that could cost less or more – which can and should be explored.
1. Free comprehensive financial advice for all prisoners. Up to 200,000 closed-book borrowers should be contacted individually to access comprehensive and holistic financial advice – not only about mortgages, but also debt, benefits and income.
This advice would be paid for by government and delivered through organisations like Citizens Advice and StepChange. Complex cases could be referred to specialist financial advisers. This advice would be required for borrowers to take up any of the next steps.
2. Interest-free equity loans to clear the unsecured element of Together loans. This former Northern Rock product, taken out by many mortgage prisoners, was made up of a mortgage of up to 95 per cent loan-to-value (LTV) and a linked unsecured loan of up to 30 per cent of the value of the property, capped at £30,000. The interest rate on the unsecured element goes up dramatically if the secured element is remortgaged with a new lender – making this a particularly toxic product.
The LSE London report says the secured and unsecured parts of Together loans could be uncoupled by clearing the unsecured element through a second-charge loan provided by the government – removing some barriers to remortgaging, which could free some mortgage prisoners with these loans. This would be interest-free for the first five years, with no requirement for regular repayments, and then would bear interest at normal market rates.
3. Government equity loans on the model of Help to Buy. Using the established model of Help to Buy loans, the LSE London report proposes that some with more substantial arrears could be helped by similar funding from the government. This would be an equity loan for a maximum of 40 per cent of the value of the property in London, and 20 per cent elsewhere, which could be used to pay down the mortgage and other existing debt.
Those with interest-only loans could be moved to part-part loans (where some of the repayment goes against capital). Again, this solution would be interest-free for five years and then attract the same interest as Help to Buy (currently 1.75 per cent increasing annually by RPI plus 1 per cent).
This solution would make sure borrowers keep some equity in their homes and that they do not incur extra debt. Importantly, it could reduce some mortgage prisoners’ LTVs, helping them to eventually refinance on the open market.
4. Fallback option: a government guarantee for active lenders to offer prisoners new mortgages. This would change lenders’ perceptions and actions for lending to borrowers with higher LTVs. The government recently introduced a similar, temporary Mortgage Guarantee Scheme to ensure high LTV mortgages continued to be available during the pandemic.
The LSE London report says the government could consider something similar for mortgage prisoners to make borrowers who have done the above steps more attractive to mainstream lenders, releasing them into the open market.
The report’s model looks at cost to the government – using several assumptions – if a realistic minimum of 10 per cent engaged with this process, right up to a target of 70 per cent engagement. It suggests this suite of solutions could cost anywhere between £370m and £2.6bn (net discounted over 10 years).
But the LSE London report adds that with this proposal, the government would still hold a stock of second-charge and equity loans at the end of the 10-year period used to calculate the cost – so as these are assets, they can further reduce the net overall cost of the programme to between £50m and £347m.