A report by the consumer panel of Financial Services Authority (FSA), Britain’s financial regulator, has warned about the controversial new rules of its own parent body.
It said that millions of homeowners were in danger of becoming mortgage prisoner from next year trapped by loans they availed during the boom period.
The report stated that the new rules by the FSA which is suppose to revolutionize the mortgage market from next summer was in fact going to make the current tight lending market even worse resulting in the increase in the numbers of mortgage prisoners.
A “mortgage prisoner” is someone who is trapped in an existing mortgage deal who faces rejection by all financiers including his own when his current mortgage deal comes to an end and he needs to re-mortgage.
This could be people with small deposit, who have opted an interest only deal, or whose loan is larger than the value of their home (negative equity).
When the mortgage market was seeing a boom many had taken out a loan but the new rules are not going to allow them to re-mortgage their current deal once it comes to an end.
The report has raised fears on how these mortgages would cope under the new rules and the treatment it would receive by the banks.
It has warned that the current market, which has become difficult for the first time buyers to get a mortgage and those with existing ones finding it difficult to move elsewhere, would worsen.
The FSA in its own assessment has said that it estimates that nearly half of all borrowers who took loans between 2005 and 2011 could become mortgage prisoners.
According to the Council of Mortgage Lenders during that period 10.5 million loans to buy a home or to re mortgage an existing property were given.
The report also warned that the new measures were not giving any signs of preventing these consumers from being charged a higher rate of interest by their lenders because they are not able to re mortgage elsewhere.
Adam Phillips, chairman of the Financial Services Consumer Panel, said amid these concerns the new rules must not be introduce unless banks and building societies are forced to treat the mortgage prisoners sympathetically.
The FSA expects the new rules to be introduced in 2013, but insists that they will not become law until the housing market is in better, stronger shape.