Pasting my article in this morning's Independent which might provide some useful context into how some have found themselves trapped and why there is market failure requiring intervention.
Government Needs to Act Now to Address the Mortgage Prisoner Timebomb
By Mark Coan Founder of Online Financial Guide
moneysherpa.ie
Around 60,000 mortgage holders are trapped with the so-called ‘vulture funds’.
These ‘mortgage prisoners’ are unable to fix their mortgage rate and can’t switch to a new lender. Over half of them are facing rates of almost 7% in July based on the latest ECB rate forecast. The resulting rocketing repayments are likely to drive increasing numbers into arrears.
Mortgage prisoners have no ability to choose another provider, leaving the vulture funds with an effective monopoly. This is a clear case of market failure.
Many of these customers have never been in arrears, but were caught up in the sale of loan books to non banks after the financial crisis. Others may have slipped into arrears at some point through job loss, divorce or plain bad luck, but have now worked their way back to making their repayments. Currently only around 20,000 of the 60,000 mortgage prisoners are actually still in arrears.
Belatedly, this week the Central Bank has indicated it will investigate the issue. I believe the Central Bank should focus on releasing mortgage prisoners by enabling them to switch away from the vulture funds, which will allow them to access current market rates of around 3% and fix to cap their repayments.
Based on policies adopted in other markets and my own experience talking to affected mortgage holders, I’m proposing three initiatives to help release mortgage prisoners.
Free Advice
Many vulture fund customers feel isolated and even stigmatised by being with a vulture fund receive little or no financial guidance. Our research indicates that up to 25,000 of the 85,000 with vulture funds can actually switch to other retail lenders or avail of equity release, but don’t as they often aren’t aware of their options and assume they are trapped. Others aren’t aware of the steps they need to take to open up the option to switch down the line, so haven’t taken those steps even though they could.
The government needs to fund independent one on one financial advice sessions for vulture fund customers to help them make the best financial decision possible. The financial circumstances of vulture fund customers are often complicated, simply sending a letter to these customers listing a few options simply doesn’t cut it.
Removal of Current Affordability Barriers
The retail lenders won’t take on many of these customers due to them failing their affordability tests, these tests calculate the mortgage applicants ability to afford the repayments based on income and outgoings. This is despite around 20,000 of the 60,000 mortgage prisoners successfully making repayments at rates much higher than they would if they switched, which is strong evidence of their actual ability to repay.
The Central Bank should work with high street lenders to introduce ‘modified affordability tests’ for mortgage prisoners, in the UK the Financial Conduct Authority did this back in 2019, to allow more of these customers to pass lender affordability tests and switch to lower rates.
Support to Close the Affordability Gap
Finally, the government should extend the current First Home Scheme for First Time Buyers to mortgage prisoners, to allow them to reduce their outstanding mortgage size in return for giving up equity in their property. A smaller outstanding mortgage equals lower repayments and higher affordability. Higher affordability means more being able to switch away from the vulture funds to lower fixed rates.
This extension would follow a similar model to the one recently used to extend the scheme to evicted tenants post the lifting of the eviction ban.
Solutions not Slogans
Political grandstanding about ‘evil vulture funds’ is misleading, distracting and upsetting to those who find themselves with these funds. These funds are simply focussed on making a return for their investors, who are mostly pension funds, nothing more.
Instead mortgage prisoners deserve practical realistic solutions to the very real challenges they face. The market is failing these households and meaningful government and regulatory intervention is required.
Government and the Central Bank have failed to address the timebomb that has been ticking since the sell off of mortgage holders started in 2008 and recent ECB rate rises mean time is running out fast. They now need to act, swiftly and decisively to implement measures to release the mortgage prisoners, before thousands more are forced into arrears.
The full moneysherpa Mortgage Prisoner report and corresponding data sources are available here
https://moneysherpa.ie/vulture-funds-ireland/. If you would like to join the mortgage prisoner campaign, need advice or have ideas you can mail us here
mortgageprisoner@moneysherpa.ie.