Are You a Prisoner to Your Loan or Mortgage?
When you take out a loan, especially a mortgage loan, your finances are usually in good order.
You have shown affordability that you can afford to repay the loan, and your credit score and credit rating was good enough to get the loan.
Life is good, your finances are good.
However, life has a way of changing, changing sometimes good, and changing sometimes not so good.
So what is a “loan prisoner?
Loan Prisoner: A loan prisoner by definition can mean a couple of things, and usually the term is used in conjunction with those borrowers that are stuck in a mortgage, but more on that specific in a bit.
If a person has a loan or debts they are not just struggling to pay, but cannot seem to get out of using conventional ways, such as refinancing, re-mortgaging, consolidating accounts, they can be deemed a loan prisoner.
They are locked into the loan they have, and cannot get out of it.
And it is not always as simple as just struggling to pay the account(s), this is more than that, and we will explain.
At the time you take out a loan or mortgage, your credit is in good shape, you can show affordability, and to the lender you are a good candidate for the loan, so the loan is approved and off you go.
You make your monthly payments as agreed, and perhaps as life goes on you experience a change in circumstances, maybe you lose your job, or face a serious illness which affects your earnings.
Two things may occur:
* You miss payments and struggle to pay your accounts/mortgage, which lowers your credit score.
* You no longer can show the income you previously had to show affordability for the loan.
And yet you continue to make the payments, not seeking any for of assistance through debt management or insolvency options.
The real issue becomes when you wish to remortgage to a better loan, maybe mortgage rates have dropped, or maybe you wish to consolidate your credit cards and other accounts, however, now you cannot show affordability, or your credit score has dropped to a point lenders will not consider you for the new loan.
You are locked into the loan and mortgage you currently have with no way out.
This is particularly a problem with some mortgage holders. They may have paid their mortgages over the years, but now due to various reasons, no longer qualify to remortgage their homes, to either reduce their payments as interest rates may have dropped, or they may be required to remortgage due to the fact their current mortgage is ending.
Consolidation loans are a way for some borrowers to reduce their monthly payments, and also get a light at the end of the financial tunnel.
Credit cards if you pay just the minimum payment each month can take many years to pay off. By consolidating these accounts, you can get a fixed term loan, and know when you will be debt free.
However, I you are struggling with the accounts, and may made a few late payments, your credit score may have been reduced, and you no longer can qualify for a loan to consolidate the accounts.
One option is a guarantor loan to consolidate the accounts. Guarantor loans are based on affordability and the fact there is a guarantor for the loan.
Mortgages and Re-mortgaging
Trying to be set free as a mortgage loan prisoner is different. Again there can be the issue that you no longer qualify for the loan, or you may not meet the affordability test, in addition to your credit score may have dropped over time.
This means that if there comes a time when the interest rates drop, or your current mortgage is ending and you need a new loan, you may not qualify or be able to get the new loan.
The regulator the FCA/Financial Conduct Authority has recognised this, and has proposed a change in the rules which would allow current mortgage lenders to approve a loan based on a “relative” affordability test as opposed to an “absolute” affordability test.
This means if a borrower has been paying their mortgage payments on time, even at a higher amount than if they were to remortgage, why would they not then continue to make their payments on time if those payments were to drop due to a lower interest rate, or better deal.
On the surface this appears to be an answer to mortgage prisoners, however, not all borrowers meet this criteria.
So while the proposed change may help some, it will not help all.
Director of Mortgages at UK Finance, Jackie Bennett stated, “The regulated mortgage industry wants to help eligible customers with unregulated or inactive lenders switch to a better deal.”
“We support the FCA’s ambition in its proposals for greater flexibility over affordability assessments and are keen to work with closely with the FCA in a joint implementation group to help those firms who want to participate, prepare and work towards a common launch date.”
“We have suggested the FCA collects up to date information on closed book customers so lenders can understand their circumstances better and develop products that meet their needs.”
So there are still some major concerns and “bugs” to be worked out.
It may be a new and future mortgage lender is set-up just for these particular mortgages than fall between the cracks.
In some countries, the USA for one, have some government agencies that take over certain government backed loans that have at one time defaulted, or the borrowers are “upside down” meaning they owe more than what the property is worth.
This agency or new mortgage specialist could be the one-stop to handle these mortgage loan prisoners.