“Mortgage prisoners”, “zombie banks”: How to tackle mortgage market nightmares?

Mortgage application with a key Print publication


The Financial Conduct Authority (FCA) and financial press have highlighted the plight of so-called “mortgage prisoners”.  That is to say customers trapped in expensive deals and unable to remortgage because of the tightening, in recent years, of affordability assessment criteria and/or because their “zombie banks” no longer offer new products.  With the problems being exacerbated following the Bank of England’s base rate rise in August 2018, Louise Power asks how firms and the FCA might help these customers to wake from their mortgage market nightmares.

The problems

A decade on, UK consumers are still feeling the effects of the last financial crisis. Increased regulation of consumer lending prompted by lessons learned from the crisis and brought into effect in 2014 means that many mortgage customers who took out a loan prior to 2014 now no longer meet affordability assessment criteria and cannot necessarily obtain a remortgage when their fixed term expires.  Under the terms of their existing deals, those customers then find themselves either rushing into unfavourable new deals or ‘trapped’ into paying mortgage interest on lenders’ standard variable rates (SVRs).  SVRs are generally much higher than fixed term rates, and can mean a significant increase in monthly repayments.  With lenders’ SVRs being linked to the Bank of England’s base rate, the recent base rate rise [1] has exacerbated the problem.

The financial crisis also led to several firms becoming ‘closed book’ lenders – that is, lenders that no longer offer new products and instead subsist only on running down their existing accounts. Northern Rock (as was) is a well-known example of this type of lender – now often termed, in the media, as “zombie banks”.  The crisis also prompted the assignment of many mortgage accounts to non-regulated third parties.  Post-fixed term remortgaging opportunities for customers of such unregulated lenders or zombie banks are also limited or non-existent.

FCA and industry action

The FCA highlighted these issues in its interim report into the mortgage market, published in May 2018.  In July 2018, in response to that interim report, lenders representing some 93% of the UK’s mortgage market agreed a cross-industry voluntary initiative that will see existing customers on SVRs who are up-to-date with repayments but would otherwise not meet current affordability criteria offered the opportunity to remortgage.

It is anticipated that that may help some 10,000 qualifying borrowers whose accounts are currently with active, regulated lenders. However it will not help the customers of inactive and/or unregulated lenders [2].

The FCA has called for more innovation to help affected consumers – but it’s not immediately obvious what.

What’s next?

The FCA has acknowledged in its interim report that these problems arise primarily from the responsible lending regulatory correction rules which it imposed in 2014 and it has clearly stated its intention to resolve what it has termed this ‘legacy issue’. The July 2018 cross-industry initiative is a very positive first step, but further industry-driven solutions will be required.  The FCA intends to publish its final findings, a summary of feedback received and proposed next steps before the end of the year.

Stop press…

Citizens Advice (CA) launched on 28 September, a super-complaint which it claims (while not limited to the financial services industry and not dealing specifically with the mortgage prisoner problem) was prompted by the treatment of mortgage customers who end up on SVRs.  CA are calling on the Competition and Markets Authority and the FCA to take action to stop long-term customers being penalised for their loyalty.

In the financial services context, CA suggests that this might involve requiring lenders to proactively ensure that existing customers – in particular vulnerable customers and those who might lack digital or other skills which would enable them to easily shop around – are on the best deals available to them. CA has also suggested that limiting the difference between the best and worst deals offered within the mortgage market might represent a solution.


[1] from 0.50% to 0.75% as of 2 August 2018
[2] In May 2018 Zoopla estimated that to amount to some 140,000 customers: 20,000 with zombie banks and 120,000 with unregulated lenders