Campaigners have warned that foreclosed home owners could lose their property as interest rates rise sharply.
The Bank of England’s six successive interest rate hikes immediately and dramatically increased the cost of borrowing on variable rate deals for owner occupiers – including many of Britain’s 250,000 “mortgage prisoners”, held at high rates that move in line with Bank Rate.
Gemma Acorn, not her real name, has been pegged to the Standard Variable Rate (SVR) since the day after the financial crisis. She bought her house in Merseyside 17 years ago using a loan from Northern Rock. After the bank collapsed, the Treasury sold Ms Acorn’s loan to SVR Lazat, a lender.
Her current mortgage rate is 5.38pc, more than double the current average effective rate of 2.11pc across all mortgages. It is also much higher than the average floating speed which is set at 3.21 pc.
Mrs. Acorn was very smitten with the proportional increase. At the end of last year her monthly payment was £700. Next month the bill will be £830 – a jump of almost a fifth. The impending price hike will further increase her costs.
Mrs. Acorn has two children, ages 18 and 14. She works full-time as a teacher but rising costs mean she is now juggling weekend work marking exams and Christmas temp work in a supermarket.
“My oldest daughter is going to university and she asked if we could go to Ikea to buy things for her student accommodation. I just can’t afford it. I feel like a complete failure,” she said.
Britain’s mortgage prisoners are often homeowners who took out loans with Northern Rock before the financial crisis. After the bank started operations, the Treasury sold the loans to a series of lenders, most of which are now inactive – meaning they are not taking on new customers and therefore have no new loans to replace borrowers.
Most mortgage holders are paying far more than normal market rates for SVRs. After the financial crisis, mortgage lending regulations became tighter, so they couldn’t switch providers.
This means they face an absurd paradox: they don’t pass the “proportionality” tests that allow lenders to pay far less than they currently pay.
Others are circumstantial – Ms Acorn bought her house with her ex-spouse and cannot change his name on the deed.
Rachel Neale, of the UK’s Mortgage Prisoners Action Group, said: “After the next rate rise, some people will have to pay 7pc. I know someone whose monthly bill has gone up by £1,000 since the rate hikes started.
Rising costs mean all 250,000 mortgage holders are at “significant risk”, Ms Neale said. “Absolutely. This is probably the way things are going.”
She called on the government to introduce a moratorium on foreclosures, prevent interest rate hikes from being passed on to foreclosed home owners and investigate the pricing of SVRs by lenders.
Speaking under the pseudonym Oliver Sands, he bought his home in Northern Rock, Gloucestershire, in 2006 with a 100pc mortgage. After the bank collapsed, the mortgage was sold to a closed, inactive lender. At the end of last year his monthly mortgage bill was £820. It’s now £890. The current rate is 5.79pc, and about 6.54pc. “I’m absolutely terrified. We are online now. Once energy prices start to rise and our mortgage increases again, we may have to sell the house.
Mr Sands and his wife have four children aged six to 18. “Our government has done this to us,” he said.
A Treasury spokesman said: “We know that not being able to switch your mortgage can be very difficult. The government continues to work to determine whether there are any practical and affordable remedies available to affected borrowers. Borrowers may find it easier to switch to a proactive lender thanks to changes by the Financial Conduct Authority and will want to use the free resources available through MoneyHelper to ensure they qualify.