Homeowners launch mortgage prisoner legal claim against TSB

Thousands of homeowners took TSB to court today in the first case of its kind that highlights the plight of mortgage prisoners.

The claimants, who took out mortgages with Northern Rock before the 2008 financial crisis, claim they have become mortgage prisoners after TSB purchased their loans from the government in 2016 and began charging a standard variable rate (SVR) at approximately double what its other customers pay.

Law firm Harcus Parker is representing 27,000 borrowers in this high court case, which is determining legal points ahead of any trial.

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The borrowers fall under TSB’s Whistletree brand and Harcus Parker claims they have become mortgage prisoners as they don’t fit modern day lending criteria and are stuck on unfair mortgage rates.

“Under the terms of the mortgage contracts, TSB was obligated to charge these mortgage customers at the TSB SVR”, says Harcus Parker.

“Instead, TSB charged these customers a separate, higher ‘Whistletree SVR’ which was approximately double the TSB SVR.”

Harcus Parker is bringing claims for Whistletree customers for the difference between the interest they were charged on their mortgage and what they should have been charged. 

It suggests that compensation could be worth up to £50,000 or more.

However, TSB disputes the claims and says borrowers have been able to transfer to new products.

A statement from the bank said: “Whistletree customers are not mortgage prisoners. Since we took over the management of these mortgages, over two-thirds of Whistletree customers have either moved to a new mortgage or closed their mortgage with Whistletree.  

"We remind customers they can switch at least annually, and this is displayed prominently on the Whistletree website.”

This is the first of a collection of claims that Harcus Parker is pursuing against current and inactive lenders who it claims have left borrowers unable to remortgage in the aftermath of the credit crunch, making them mortgage prisoners.

What is a mortgage prisoner?

A mortgage prisoner is defined as someone who is stuck on a lender’s pricey standard variable rate and is unable to remortgage to a new deal as they don't fit the lending criteria.

In many cases the borrower will be with a lender that is no longer operating so has a closed book, making it harder to switch or find a product transfer.

It mainly affects people who took out mortgages before the 2008 financial crisis and ahead of the introduction of the mortgage market review in 2014, which introduced tougher affordability requirements.

There are also more restrictions on interest-only mortgages.

This means borrowers who may have been approved for mortgages in the past, are now struggling and are left on more expensive deals.

A homeowner can also be a mortgage prisoner if the value of their home has fallen below the mortgage amount, known as negative equity.

“Mortgage books, both from collapsed lenders and currently trading ones, are bought and sold as investments by businesses that are not themselves lenders, albeit they may ultimately be owned by a lender,” says Scott Taylor-Barr, principal adviser at Barnsdale Financial Management.

“This means they do not hold the required regulatory permissions or have the resources to offer product transfers and additional borrowing. They are investment businesses, not lending businesses, which creates issues if you are a borrower whose mortgage is owned by one of these companies. 

“A proportion of the business that sits within these books will have been lending that is not acceptable to most lenders now, such as self-certification of income or mortgages at over 100% of the property value.”

How to escape if you become a mortgage prisoner?

The Financial Conduct Authority (FCA) estimated in 2021 that there are 195,000 borrowers in closed books but just 47,000 are actual mortgage prisoners who are unable to switch as they are outside a lender’s current appetite.

The regulator has relaxed its lending rules to let lenders bypass affordability tests in these situations so a borrower can switch products.

Of the 195,000 figure, it suggests that 66,000 may be able to switch, while 30,000 can’t but are unlikely to benefit from a move.

There are also 34,000 borrowers who are in payment shortfall and 18,000 who are near term. These borrowers wouldn’t be able to switch to a new deal, even if they were with an active lender, the FCA said.

“People should speak to a mortgage adviser to see what options they have available,” adds Taylor-Barr.

“They may be pleasantly surprised at what could be available to them now.”