Government loan sales trapped mortgage prisoners

A new report suggests that the Government made £2.4 billion by selling mortgages from collapsed lenders to investment firms, with 200,000 mortgages sold to firms that cannot offer new deals. With other lenders refusing to accept these homeowners, they have been left as so-called ‘mortgage prisoners,’ trapped on high rates.

The London School of Economics (LSE) report, which was commissioned by MoneySavingExpert founder Martin Lewis, suggests that mortgage prisoners have been trapped on high rates since the 2008 financial crisis. Many have loans that were sold by the state to ‘closed book’ inactive lenders – largely investment companies that are not regulated to lend new mortgages – making it difficult for them to move to cheaper rates.

The Prisoners have suffered financially, mentally, and physically for more than a decade. The horror of being unable to escape unaffordable mortgages has had a devastating impact on many. In the past year, near-monthly rate rises have seen some prisoners’ rates leap from 4.5 per cent to as much as 8.29 per cent.

The LSE London report proposes solutions that would help prisoners eventually remortgage with active lenders, including an offer of ree comprehensive financial advice for all prisoners (required for any borrower who might go on to access other solutions). Interest-free equity loans to clear the unsecured element of Northern Rock’s ‘Together’ loans, Government equity loans on the model of Help to Buy, interest-free for the first five years and a fallback option: a government guarantee for active lenders to offer prisoners new mortgages.

The LSE London report estimates these solutions could cost between £50m and £348m over 10 years depending on take-up. While the overall outlay would be £370m to £2.7bn, this is reduced to £50 million to £347 million net, as the government would hold some equity loans itself.

Kath Scanlon, Distinguished Policy Fellow at LSE London and lead author of the report, said  “Since our research began in late 2019, the situation facing mortgage prisoners has become dramatically more difficult. Rises in interest rates and the cost of living pressures occasioned by the conflict in Ukraine have made it more urgent to address the issue. We hope that our report contributes to finding real solutions.”

Martin Lewis, who funded the report and is the founder of MoneySavingExpert, said “This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations.”

“When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed. The government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers.”

“I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”

Rachel Neale, from the UK Mortgage Prisoners group, which campaigns for victims of this mortgage scandal, said “We thank Martin Lewis for the funding of this report. It reveals that Treasury made £2.4bn surplus out of the sale of our mortgages, whilst mortgage prisoners continue to be profiteered from. The report also confirms what UK Mortgage Prisoners has always known, that harm and detriment to borrowers caused by the sale of these mortgages was disregarded by government as far back as 2009 when it opted not to act to protect borrowers.”

“The severe harm already endured for over a decade, compounded now by 10 consecutive rate rises, means time is not a currency mortgage prisoners have. The proposed solutions need to be considered in detail, and urgent action is required now before more homes and lives are lost.”