UK property owners who want to reduce their mortgage payments by downsizing are being refused for cheaper loans, essentially trapping them in a house that they are struggling to pay off.
The hardest hit are those who want to pay down their debt and reduce their mortgage payments by transferring the loan to a smaller property. Lenders are subjecting them to the stringent new affordability tests and informing them that the lower repayments are “unaffordable". If these homeowners move to a different lender, they risk being slapped with heavy repayment penalties.
The Financial Conduct Authority tried to prevent this situation when the new affordability rules came into effect in April. The FCA created special transitional arrangements allowing lenders to bypass the new rules for existing borrowers who are not seeking to extend the term of the loan or borrow more money. But many lenders are not doing so.
After repeated press coverage of the situation, the FCA has urged lenders to stop subjecting existing borrowers to the new affordability checks. They are refusing to comply, however, and homeowners are literally paying the price.
Some homeowners who originally took out an interest-only loan to get on the property ladder are struggling to transfer the loan to a cheaper property, which is being blames on the tough new eligibility rules.
In some cases property owners looking to move are finding buyers for their homes but then failing the new detailed affordability checks as they look to transfer their own loan onto a new home. Lenders are going as far as asking applicants how much school dinners cost and if children receive pocket money.
Some property owners believe it is a deliberate move by some lenders to trap them into a contract and claim the approach is unethical.