Greg*, an airline pilot from the North West of England, bought a house with his partner in 2007. More than a decade later, their lender collapsed, their house fell in value and they are stuck in a mortgage they can’t get out.
Greg and Helen* purchased their three-bedroom home with a mortgage from Northern Rock.
But long after the bank’s collapse, they’re still stuck on the same inherited contract, unable to remortgage.
They and thousands of people across the country are what are called “mortgage prisoners”.
What is a Mortgage Prisoner?
A mortgage prisoner is someone who is stuck with a mortgage that they cannot get out of by paying off their mortgage (by switching to another mortgage or another lender), or who has an interest-only agreement and no way to repay the loan.
The longer you’re stuck with a mortgage, the more likely you’ve been transferred to the lender standard variable rate – a much higher interest rate than you could get with a new agreement. This means mortgage prisoners are often paying thousands of pounds more than they should each year.
There are believed to be more than 150,000 mortgage prisoners in the UK, many of whom are at risk of losing their homes.
Getting a Mortgage, ‘Together’
The deal Helen and Greg made with Northern Rock was called a “Together” loan. It included an unsecured loan of £30,000 plus a mortgage for 95% of the property’s value.
Greg says the loan was mostly for his pilot training. “It’s very expensive to become an airline pilot,” he told us.
“They would loan you 125% of the value of the property, but £30,000 was an unsecured loan, not part of the mortgage.”
This would be unheard of in today’s market, where even 100% mortgages are rare – but things were very different before the financial crash of 2008.
The terms of Helen and Greg’s mortgage meant that the interest rate on the loan would skyrocket if they paid off to another lender. So when Northern Rock asked Greg over the phone if he was happy with his mortgage a year later, he didn’t consider leaving them.
Little did he know that this phone call would seal his fate for the next two decades.
Greg and the Northern Rock agent discussed the idea of him moving from a repayment mortgagewhich consists of repaying a portion of the mortgage itself each month plus interest, at a interest only mortgagewhere the loan is not repaid along the way.
“The basis on which it was discussed was like, ‘Well look, real estate values are going up all the time’ – because at the time it was before the real estate crash – ‘so actually, well whether you’re not paying the capital back right away, your home’s value continues to rise, so you’re still building equity in the property”.
Switching to an interest-only mortgage would reduce Greg’s monthly payments. Greg and the agent discussed how he could use the extra money to pay off other debts – perhaps the unsecured loan.
If Greg’s property had continued to rise in value, he could have sold it to pay off the mortgage at the end of his term in 2030. But it didn’t work out that way.
“The market crashed and the value of the property dropped significantly,” says Greg. “And it hasn’t changed much between then and now.”
Greg and Helen’s property was valued at £135,000 when they bought it in 2007. When they had it appraised in April this year, it was worth £120,000. So even if they sold the property in 10 years they would still owe NRAM £15,000, the current owner of their mortgage (more on this below).
This means they have negative equity, which means they owe the mortgage company more than their home is actually worth.
What happened to Northern Rock’s mortgages after it collapsed?
NRAM (Northern Rock Asset Management) has a complicated history, but in short, it was formed from the remains of Northern Rock after the bank was nationalized in 2008.
NRAM now handles the ‘bad’ loans that were on Northern Rock’s book, while many of the ‘good’ loans were sold to blank silver.
“In the letter that came in, they actually referred to them as ‘good’ mortgages and ‘bad’ mortgages,” says Greg. ‘I remember reading it at the time thinking, “Oh, thank you so much!” I no longer have a copy of this letter but I certainly remember reading it.
NRAM is not an active mortgage lender. It is authorized to service mortgages it already has on its books, but it cannot issue new mortgages or change existing customer terms.
It’s called a “zombie moneylender,” and it’s at the heart of Greg’s problems.
About every two years someone from NRAM calls Greg.
They ask him – Greg paraphrase – “Do you know that the repayment is not made, because your mortgage is only for interest?
Each time, Greg tells them he knows. He also asks if he can switch his interest-only mortgage to repaying over a new, longer term, allowing him to slowly pay off the balance.
The answer, invariably, is no.
An industry-wide problem?
“I’ve never had an affordability issue, ever. It never was,” says Greg. And in fact, a new repayment mortgage might be cheaper than the current interest only one, if Greg got a better rate.
But NRAM informs Greg that he can’t change the terms of his mortgage because he doesn’t have a loan license.
If he were to switch to a repayment mortgage with a new term of 25 years and an interest rate well below his current rate of 5.03%, Greg says, “The repayment could be the same, except the balance would be refunded. The house would actually be paid off rather than being a ticking time bomb in 10 years.
A spokesperson for UKAR (the holding company of NRAM) said: “We understand that some customers may have limited options, particularly due to the tightening of criteria following the implementation of the Mortgage Market Review and the Mortgage Credit Directive, but this is an industry-wide issue, not specific to NRAM.
“We understand that this can be difficult and stressful for customers in this situation and we welcome FCA’s efforts to explore ways to help customers who may not be able to switch.”
The Mortgage Market Review and the Mortgage Credit Directive were, in short, efforts to change the system to avoid another stock market crash. The tighter affordability controls they introduced had the effect of restricting some people’s ability to re-mortgage.
The FCA is the financial regulator, and it is exploring new market reforms.
Defusing the mortgage “ticking time bomb”
In a situation like this, the obvious solution would usually be to remortgage to a new lender. But Greg and Helen can’t because they have negative equity.
Another option could be to sell the property, but if Greg and Helen did that, they wouldn’t get enough to pay off the mortgage.
So when their family outgrew the small three-bed property (“Room three is a storage room, it’s tiny,” says Greg), they had a problem.
“We were running out of space. It was very difficult because we were really stuck in this house. We wanted to move for years, and we couldn’t get out.
“We couldn’t sell it or get a new mortgage because we have negative equity.”
In 2015 the couple decided to rent the house out to tenants, using the rental income to cover mortgage interest payments, and to buy a bigger house with a new mortgage from Barclays.
Greg also repaid his original unsecured loan of £30,000 by taking out another loan from Barclays.
“I am an ‘accidental owner’. It’s not a business for me, it’s not something I want to do. It’s something I had to do because I can’t sell the house, because it’s not worth as much as the mortgage.
“I needed to move on because I have a growing family. We couldn’t stay there forever.
Greg knows he was lucky to have been able to do this. If he earned less, he would have had a harder time getting a mortgage on a new property.
“If I was still living there, I would be afraid that in 10 years, if I couldn’t pay off the mortgage, I might lose my house.” I am worried for people who are in this situation.
“It’s a mortgage trap”
As well as become owner, Greg accumulated a tremendous amount of knowledge during his time as a Mortgage Prisoner. In two interviews with Which?, it was clear that he had gone to great lengths to find potential solutions and workarounds for his situation.
Despite a looming £135,000 bill, Greg appears levelheaded. “That’s the job I do,” he says. “If you’re flying a plane and worrying about your mortgage in the background, that’s not a good recipe.
“It will get to a point where the mortgage company will say, ‘Okay, there you go. There’s your mortgage. Now you owe us £135,000. And I don’t have that. This concern is still there.
“It’s a trap, it’s a mortgage trap. And there is no way out.
Is there help for mortgage prisoners?
Greg and Helen’s situation may seem unusual, but tens of thousands of people are trapped in mortgages that are costing them thousands of dollars more than they should be paying, and from which they cannot escape.
The FCA announced changes to its regulations earlier this year, with the intention of helping mortgage prisoners remortgage. But some say these proposals do not go far enough.
The Mortgage Prisoners All-Party Parliamentary Group was set up in June to review FCA regulations and determine if more could be done to address this outbreak.
Relaxing affordability requirements is one suggestion. This would allow those who received mortgages under the old pre-crash lending rules, but are deemed ineligible for a mortgage under the tougher new regulations, to remortgage at cheaper deals.
If you have an interest-only mortgage that you don’t know how you’ll pay off, read our guide to interest only mortgages.
You can also register at Which? money slip to keep abreast of developments in mortgage inmate assistance.
Learn more about our Mortgage Prisoner coverage here:
*Names have been changed to protect identities.