When the Prudential Regulation Authority (PRA) introduced new lender guidelines, many landlords found themselves with limited options. But, what is a mortgage prisoner, and how can you get out of the situation if you find yourself stuck?
What is a ‘Mortgage Prisoner’?
A mortgage prisoner is someone ‘trapped’ with their existing mortgage, as they do not meet current lending criteria with other lenders. As such, they have no other option to remortgage to. Someone in this position could be stuck paying an uncompetitive rate, usually the lender’s Standard Variable Rate (SVR), with no ability to source a cheaper deal elsewhere. Furthermore, while someone in this position may be able to secure a product transfer with their existing lender, they would not be able to capital raise for further investment.
Who is the PRA?
The PRA, or the Prudential Regulation Authority, is a regulatory body for the financial services industry. Part of the Bank of England, the PRA is responsible for regulating and supervising banks, building societies, credit unions, insurers, and major investment firms.
What were the PRA Changes?
Introduced in 2017, the PRA brought out its guidelines and expectations of lender underwriting standards. A key change that came out of this was that lenders were now expected to consider a borrower’s tax position, and the impact of future interest rate rises when assessing affordability based on rental income. The fall out of this was that landlords could now borrow less per pound of rent.
What impact did this have on the market?
The guidance published was not prescriptive and gave limited information on what lenders were specifically expected to do, leaving the advice open to interpretation. While some lenders tightened their criteria rigorously, others made more subtle changes to their approach. However, the new guidance did mean that some landlords found that their properties no longer met the rental calculations, and were unable to move to a new lender, thus becoming a PRA mortgage prisoner.
What’s changed since 2017?
Over time, lenders have become more comfortable with the guidance, what is expected of them, and how they can open up their policy to balance protecting borrowers as well as supporting them. For example, many lenders will now offer an enhanced rental calculation if a borrower takes a five-year fixed rate, as they protect themselves from interest rate fluctuations over a sustained period of time. Since the publication, lenders have introduced different rental calculations depending on whether the application is for an individual or limited company, a borrower’s tax code, and the type of property on the application. This has meant that many landlords who were even unable to remortgage just a couple of years ago may find that they now have many more options available to them.
We had a client who had had to take a fixed rate from a challenger bank five years ago so that the rental calculation worked, and he was therefore stuck. They were paying a rate of 4.58%. However, owing to the change in approach to the rental calculation, we were able to secure him a new five-year fixed rate at c1.79%.*
If you are concerned that you may be a mortgage prisoner, we’d love to hear from you. Our expert team of brokers have whole-of-market access, so will be able to find all options that are available to you based on your situation. With our experience of complex buy to let cases, you can rest assured that we will do all we can to secure you the property finance you need. Submit an enquiry today to hear what your options could be.
*Rates as at February 2022 and subject to change.
9th March 2022