Building your Tembo Plan
Mortgage prisoners: trapped paying up to 9% interest
You might not have heard of a mortgage prisoner before. If you have, it’s likely because they’ve been hitting the headlines in recent months, and for good reason.
What is a mortgage prisoner?
In short, customers who bought mortgages (often sold by less than scrupulous advisors many years ago) are now finding they are unable to move onto a new deal or a lower rate. This leaves them stuck in limbo, paying the lender’s standard variable rate (SVR), which can climb up to 9%. Mortgage prisoners are paying thousands of pounds in interest charges over and above what they should be each year, leaving them financially trapped. The situation regularly leads to depression, anxiety or family breakdown.
The pain and hardship caused by being a mortgage prisoner doesn’t appear to be going anywhere soon. Despite this affecting an estimated 250,000 homeowners across the country, the government has made little tangible process to help mortgage prisoners.
Why is this happening?
Let’s look at why people are struggling to find a new mortgage deal. In our experience, we’ve come across five key reasons when speaking to our customers which explain why mortgage prisoners are stuck:
This seems to override the vast majority of the cases that we see. Customers are so afraid to call and speak to their current lender about any changes to their financial situation or financial problems that they may have had, that they end up doing nothing. We find that talking things through helps to clarify the situation, so the customer can understand what their options are and whether there are immediate changes that they can make to improve their financial position. At Tembo we offer a free and confidential initial call, so there is no risk that you will end up in any worse position that you are already.
Change in income.
This is one of the most common problems - where a homeowner’s income is lower now than when they first got the mortgage. This could be caused by a number of factors such as redundancy, retirement, illness or a change in career. Standard residential mortgages or interest only mortgages are often not able to be used to address these issues as the strict affordability criteria cannot be met. Tembo has a variety of family-based financing solutions where rates can often be significantly lower than the existing standard variable rate.
Negative or minimal equity in the home.
This is when the value of the home has fallen below the original loan amount. Many of the mortgages that were sold before the 2008 financial crisis offered very low deposit requirements. A small drop in the value of the property means the customer can quickly fall into negative equity. This is despite them paying their mortgage on time each month and not having any change to their circumstances. The issue for a new lender is that they would need to base any re-mortgaging on the most up to date valuation. There are a number of options that Tembo has to boost the size of the deposit or equity in the home, but this would only really help where there is still some remaining equity and it hasn’t fallen into negative equity altogether.
Credit issues and missed mortgage payments.
One of the most tragic consequences of being a mortgage prisoner is that a change in circumstances or fall in the value of your home may mean you are unable to meet all of your payments. The past 10 years have seen increasing job insecurity and low or no pay rises across many jobs, so monthly outgoings can end up exceeding what is coming in. Depending on how significant the credit issues have been, there are still options that can be considered to get a lower rate, but it depends on what level of arrears have been incurred.
The customers mortgage has been sold to a hedge fund.
When banks like Northern Rock went bust, the loans they had made were sold off to hedge funds. The new owners often don’t have a lending licence to make new loans, which means that they cannot offer any new loans to their existing customers. Many of these customers can’t move away from their lender and the lender can’t help them get a new lower rate loan, so the customer is trapped in an awful Catch 22. Tembo has access to over 90 different lenders so we can help identify potential alternatives to the existing lenders depending on specific financial requirements.
We’re fighting unfair financial practices
Tembo is on a mission to help people buy a home. Many of our customers are first time home buyers but we also help people trapped in poor value mortgages too.
People who have less money often end up getter a raw deal from financial services companies, paying far more in interest costs than those that are better off. This is known as the poverty premium. Tembo is focused on trying to find ways to address the poverty premium and we are fortunate to be backed by some of the UK’s leading social purpose investors who are helping us to achieve these goals.
One of the main ways that we help our customers is by enabling them to work more closely together with their families so they can get access to better rates on lending. The super-rich do this all the time, through a network of “family offices”. Tembo is democratising this approach for those that need it most. The catch is that you need to have a friend or ideally family member who may be willing to provide some support to you. This support won’t be a lump sum of cash but would require someone who has either a decent income or who owns their own home already.
We will not be able to help everyone, but so far 70% of our customers would not have been able to proceed to buy or refinance their home without us. That is something we’re pretty proud of. We are also delighted that for those customers that did have an alternative to Tembo, we have so far been on average 50% cheaper in terms of interest charges that the next best alternative over the initial term of the loan.
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