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Mortgage Prisoners - How Equity Release can help!

What is a ‘Mortgage Prisoner’? The Financial Conduct Authority classifies these as ‘Borrowers who are unable to switch to a new mortgage deal despite being up to date with their mortgage payments and, depending on their loan and borrower risk characteristics, could potentially benefit from switching.'

These individuals find themselves trapped in a mortgage that may not be in their best interests but are unable to swap for a variety reasons; This could be due to their age, their affordability, or the term ending with no support from the current lender to extend or move to an alternate product. In each case, this leads to their finances being affected, with higher interest rates in the marketplace demanding a higher payment which may be unsustainable for some, and without the ability to service these payments, their beloved homes may be at risk of repossession, or may need to be sold off to pay off the mortgage in full.

In this Blog Post, we delve into the predicament faced by Mortgage Prisoners and explore how Equity Release can emerge as a beacon of hope, offering a lifeline to secure their homes and financial well-being.

A report created on July 2021 by the FCA noted 195,000 borrowers that have mortgages held by inactive firms (or ‘in closed books’), and of these, only 47,000 could be classed as ‘Mortgage Prisoners’ per this definition. However, with Equity Release Lifetime Mortgages, we are also able to assist those that have mortgages nearing the end of term, or those in a payment shortfall, letting us help a potential 52,000 additional borrowers.

Challenges Faced by Mortgage Prisoners:

The challenges faced by mortgage prisoners are varied. They may be stuck on high-interest rates, facing unaffordable monthly payments, or locked into interest-only mortgages with no viable repayment plan. In addition, changes in personal circumstances such as divorce, job loss,  illness or retirement can negatively impact the situation, making it even more difficult to find a solution within the traditional mortgage market.

Equity Release: A Lifeline for Mortgage Prisoners:

Enter equity release, a financial solution that could offer a lifeline to mortgage prisoners. Equity release allows homeowners aged 55 and over to unlock a portion of the equity tied up in their property, providing them with a lump sum to clear their current mortgage, negating the need to sell the home. This option can be particularly attractive for those who are asset-rich but cash-poor, offering a way to access funds to pay off existing mortgages or debts, improve their standard of living, or fund retirement.

How Equity Release Works:

Equity release comes in two main forms: lifetime mortgages and home reversion plans. With a lifetime mortgage, borrowers can release funds as a tax-free lump sum, or as a lump sum with access to a ‘Cash Reserve Facility’, a pot of money that can be ringfenced and accessed as and when needed, while retaining ownership of their home. The loan, plus interest, is repaid from the sale of the property when the borrower passes away or moves into long-term care.

Home reversion plans involve selling a portion or all of the property to a provider in exchange for a lump sum or regular income, with the homeowner retaining the right to live in the property rent-free until they pass away or move into care.

The Benefits of Equity Release for Mortgage Prisoners:

Equity Release presents several benefits to homeowners in dire straits due to interest-only mortgages:

For mortgage prisoners, equity release offers several benefits. Firstly, it provides access to funds without the need for affordability assessments, making it an option for those who may not qualify for traditional mortgages.

Secondly, it can help reduce financial stress by paying off existing mortgage debts or high-interest loans, reducing monthly outgoings and providing greater financial stability. In addition, equity release offers flexibility, allowing borrowers to choose how they use the funds to meet their individual needs and goals, and offers a variety of options for payments, including monthly servicing, irregular payments, or choosing to allow the interest to roll-up over time while still having the security of remaining in the property.

There is also the ‘No Negative Equity Guarantee’ As part of the Equity Release Council rules, all Equity Release Providers and products we recommend offer a "no negative equity guarantee," this ensures you can remain in the property even if the outstanding amount owed is more than the property value. Should the amount owed value more than your property is worth, the Lender will have to take the loss.

Mortgage imprisonment can be a daunting and frustrating experience, but there is hope. Equity release provides a viable solution for those trapped in unsuitable mortgage deals or those reaching the end of their term, or whose term has already ended.  

As equity release advisers, we understand the challenges faced by mortgage prisoners and are committed to helping individuals explore their options and recommending the right solution for their needs.

If you or someone you know is struggling with mortgage imprisonment, reach out to us today to see if an Equity Release lifetime mortgage could help you break free and enjoy a more secure financial future.

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