Opinion: we need a Government-backed mortgage lender
Thousands of borrowers are trapped on rubbish interest rates because of changed regulations. The Government made this mess - it should take responsibility for solving it.
Last month the FCA, the financial regulator, published its interim report into how the mortgage market is functioning. And the headline findings were all pretty good - for the majority of borrowers, things are working pretty well, with
The problem is that there is a sizeable minority for whom the current mortgage market is a complete mess.
The FCA’s study found that there are around 30,000 mortgage borrowers who are up to date on their mortgage payments but are stuck on expensive deals and have no chance of moving to a better one.
You see, when you get to the end of the initial fixed or tracker period on your mortgage, you move onto the lender’s standard variable rate (SVR).
These rates are much more expensive than decent new deals; it’s really important for borrowers to remortgage once they come to the end of that initial period, or else they are wasting a small fortune unnecessarily.
When online mortgage broker Trussle ran the numbers last year, they found that borrowers on the SVR are paying an AVERAGE of £4,900 a year more than they could do if they were able to switch.
However, as the FCA found, there are thousands of borrowers who are unable to due to circumstances beyond their control.
Why can’t I switch?
A few years ago the regulators introduced the Mortgage Market Review, which pushed mortgage lenders to ask far tougher questions when assessing borrowers.
As a result, there are plenty of borrowers who were able to pass the old affordability tests but are now a bit stuck, even though they are completely up to date with their mortgage payments and in most ways model borrowers.
As the FCA is well aware, this isn’t a great situation. It’s suggested a few ideas that might help, like forcing lenders to offer better deals to these borrowers if they are existing customers, but even this is more complicated than it seems.
That’s because many of the borrowers trapped are with lenders that aren’t actually active in the market at the moment, like Bradford & Bingley, which was nationalised after the financial crisis and no longer lends to new customers.
these are the lenders that have pretty much closed their doors and halted all new lending, simply maintaining their existing loan book. What’s more, some of these inactive lenders aren’t even authorised by the FCA.
The regulator has openly said it has “far fewer options” for helping these borrowers.
This isn’t good enough
The FCA is right to flag up this issue as it’s a serious one, albeit one which is only affecting a relatively small number of borrowers.
But it’s simply not good enough to leave thousands of borrowers paying through the nose for mortgages when they don’t have to. These borrowers are up to date on their repayments - we know they can manage those payments at the moment, at a higher rate, so it’s farcical to prevent them moving to a cheaper deal.
Obviously, the FCA can’t force lenders that have essentially closed to re-open their doors just for the sake of these borrowers. So what other options are there?
We've listed the best fixed-rate mortgages, from two years up to 10
Is it time for a Government lender?
One option would be to loosen the rules for mainstream lenders in order to take on these borrowers.
But I’m not sure that in the current climate, with the Bank of England openly concerned about rising debt levels, that such a move sends the right message. Besides, these stricter affordability rules were introduced for a good reason, after all.
Nonetheless, we need to have SOMEWHERE for these borrowers to move to. So why not a Government lender?
It’s not like we don’t already have Government involvement in areas of financial services where leaving it to the industry isn’t working. Look at Flood Re, the government-backed service which helps thousands of people up and down the country get hold of affordable home insurance even if they live in an area with a history of flooding.
If it was just down to the insurers themselves - as it used to be - these households wouldn’t be able to get cover, even though in practical terms the chances of an actual flood may be fairly minor.
I can speak from experience here - my property flooded in 1947, and even though the area’s flood defences have been significantly improved since then, insurers still run a mile at the thought of offering flood cover.
So the government stepped in with a system where Flood Re takes on the risk of flood cover, and traditional insurers cover the rest.
Why couldn’t we have something similar in the mortgage market, where a Government-backed lender took on some of the risk, allowing these beleaguered borrowers to move to a loan where they aren’t being milked for every penny?
It would allow these borrowers to move to a more fairly priced loan, and make the Government a few quid to boot.
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