There has been much debate around the issue of ?mortgage prisoners? and what can be done to help those borrowers on reversion rates who are up-to-date with repayments but, because of stricter affordability criteria, are currently ineligible to move to an alternative product provided by their lender. The recent Financial Conduct Authority (FCA) Mortgage Market study highlighted this issue, and the industry has also been working to resolve this for some time with lenders having already switched many borrowers to new rates.

Last month UK Finance published figures on mortgage product transfers for the first time. The figures showed that nearly 400,000 borrowers switched product with their existing lender in the first quarter of 2018. This data supports the FCA findings that most customers switch to a new deal shortly after their previous deal expires and most also choose to remain with their existing lender.

The industry voluntary agreement we announced last week, to which lenders representing 93 per cent of the UK mortgage market signed up to, is aimed at helping those borrowers with regulated and active lenders who remain tied into deals that may not be the most suitable for their needs. FCA figures from 2016 suggest this figure could be 10,000 borrowers.

It is also important to say this is not about lenders not wanting to help customers from other lenders - but there are rules in place which make this difficult, if not impossible.

In 2014, when new mortgage rules were introduced in response to the financial crisis, 'transitional arrangements? were put in place which meant that lenders could 'turn off? the new stricter affordability assessment and stress test for customers who wanted a like-for-like product transfer. The transitional rules could also be used if a customer wanted to move between one lender and another but didn't want to borrow more.

However, when the Mortgage Credit Directive (MCD) was introduced in 2016, the government and FCA's interpretation of the Directive meant that lenders could not use the transitional provisions between other lenders. Since that point, if a customer moves from one lender to another then a new mortgage contract has to be written - and the MCD requires a new affordability assessment.

Many customers who took out a mortgage before 2014 may not be able to meet the new stricter affordability tests - in particular, the stress test which requires the lender to check that the borrower could afford the payments at the reversion rate plus a margin. The Financial Policy Committee has said that the margin should be three per cent over the reversion rate, which means that the majority of customers are having payments stressed at an average of 6.75 per cent. It's this hurdle that many customers who took out their mortgages before the stricter affordability tests were introduced in 2014 are unable to meet, even if they can demonstrate that they are able to manage a higher monthly payment. As a result, these borrowers are tied to remaining with their existing lender.

The group of customers most affected by the 2016 MCD rules are those whose mortgages are with lenders who no longer issue new mortgages. These customers are therefore stuck with a lender who cannot offer them a product transfer to a lower rate and they cannot pass the affordability test to move to a new lender. The FCA estimates there are 140,000 customers of inactive lenders or unregulated owners who would benefit from switching but who cannot.

Andrew Bailey, Chief Executive of the FCA, talked about the issue of interpretation of the MCD in evidence to the Treasury Select Committee in June and whether ?we are over-interpreting it?. He added: ?The challenge at the moment?it is really bonkers?is that you can remortgage with an active lender. If you are with an active lender, you can remortgage with your existing lender, even though you have failed the test of affordability for a new mortgage. By definition, you are only going to remortgage if it is better than your previous mortgage, so it must be beneficial to you. All the advice we and the Treasury have had is that, if you are trying to remortgage with another party, you run into this trap. Now, this is just silly.?

The FCA has said that it will work actively with the Treasury to see what can be done.
Lenders are keen to assist those borrowers we can help. Yet unless the FCA and the government make changes to the rules so that a like for like transfer between lenders no longer requires an affordability assessment, UK Finance members will not be able to help these real ?mortgage prisoners?.