MPs are challenging the government to live up to a promise to help homeowners trapped paying high interest rates because the Treasury sold their mortgages to unregulated firms.
Since they cannot switch to a better deal, an estimated 250,000 homeowners are forced to pay standard variable interest rates.
These are well above what a competitive mortgage would charge.
But moves to ease their plight are being blocked, MPs say.
The House of Lords has passed an amendment to the Financial Services Act to cap rates for borrowers in that position, known as “mortgage prisoners”.
But government whips are instructing Conservative MPs to vote against the amendment in the House of Commons on Monday.
Chancellor Rishi Sunak has promised to look at “workable solutions” for the homeowners. But the Treasury claims the SVR cap would be “unfair” on other borrowers.
Since the financial crash, tougher affordability checks have made it hard to change lenders if your mortgage is large compared to your house price – or if you’re close to retirement or have bad credit.
But most mortgage borrowers can still switch to a cheaper mortgage deal on lower interest rates with their existing lender.
However, an estimated 250,000 borrowers – such as mother-of-two Vanessa Bampton – have seen their home loans sold by the Treasury to unregulated firms that do not offer new mortgage deals.
As a result, they are trapped by their mortgages, forced when their initial deal ends on to high standard variable interest rates – where their payments can be double or treble what they would pay in a competitive mortgage.
Vanessa and her husband purchased their Bournemouth home in 2006 with a mortgage with Northern Rock. At the time, it was a market-leading loan approved and regulated by the Financial Services Authority.
However, in 2008, after Northern Rock had been nationalised, their interest rate jumped as they went on to the lender’s standard variable rate.
But because they had borrowed a large sum compared to the price of their home, known as a high “loan-to-value”, they could not switch lenders.
“Our mortgage went up overnight and literally almost doubled. Our disposable income was zilch,” said Vanessa.
“And when we moved into this house, we had some work done to it. We had to put a boiler in the new kitchen and so we took out a small loan for that. So we couldn’t cover all of our outgoings.
“I’ve suffered depression over it. I’ve had two or three jobs over the period since then and my husband was trying to study and it’s been so, so difficult. I can’t express how hard it’s been for us as a family.”
In 2009, Vanessa’s mortgage was moved, with hundreds of thousands of others, to Northern Rock Asset Management (NRAM), which had been separated from the retail arm of Northern Rock, later sold to Virgin Money.
The same year, the Treasury, then under Labour Chancellor Alistair Darling, held a consultation on the mortgage market.
It warned that distressed mortgage lenders were selling books of mortgages to unregulated hedge funds and private equity firms “attracted by the possibility of purchasing assets at a discount”, that were were unregulated and therefore not bound by the regulator’s requirement to treat customers fairly.
“Non-regulated owners of regulated mortgage contracts may seek to maximise margins by raising interest rates and charges, potentially to levels that are unaffordable to borrowers,” the Treasury consultation said.
“In some cases, the lack of regulation and the possibility of acting in this way to extract profit may be a contributing factor to firms’ desire to purchase these mortgages.
“Such activity clearly has the potential to cause severe harm to borrowers,” it added.
“The onward sale of regulated mortgage contracts may also be seen as unfair, as it leads to a reduction in protections for some consumers, both in absolute terms and relative to other borrowers who have purchased similar financial services.”
However, under the Coalition government of 2010-15, Chancellor George Osborne was keen to re-privatise assets nationalised in the 2008 crisis.
In 2014, the Treasury cast aside those concerns and sold a book of 270,000 Northern Rock mortgages in NRAM, amounting to £13.5bn of outstanding home loans, to US private equity firm Cerberus, a sprawling guns-to-finance conglomerate owned by Trump-supporting billionaire Steve Feinberg.
It was the biggest privatisation in UK history. The taxpayer received just £5.5bn in cash.
Because Cerberus did not offer new loans, borrowers such as Vanessa, who could not switch lenders, also could not access cheaper deals with their existing lender.
As a consequence, they had no choice but to pay standard variable interest rates costing substantially more than the market rate.
Because many mortgage prisoners have now been paying those elevated rates for more than a decade, the additional cost runs into tens of thousand of pounds.
A mortgage prisoner with an average mortgage of £165,000 has overpaid in interest between £25,000 and £45,000 over the past decade, according to a report by the UK Mortgage Prisoners action group.
In a House of Commons debate on Monday, MPs will press the government to support the reform, which imposes a cap on standard variable rates charged by firms in “closed books” (meaning the firm that owns them does not offer new mortgage deals), such that their interest rates were no more than 2% above the Bank of England’s base rate.
After the last Budget, Chancellor Rishi Sunak promised to look for “workable solutions” to help mortgage prisoners.
But in spite of the chancellor’s promise, the Treasury has been lobbying MPs hard not to support the Lords amendment.
Seema Malhotra, chair of the all-party parliamentary group on mortgage prisoners, said: “We need to do something to protect these consumers, we need to do something to bring back some sort of level playing field for people who are in this situation through no fault of their own they took out their mortgages in good faith with regulated fully regulated High Street lenders.
“It’s through the government selling off these mortgages without adequate protection to these mortgage loan sharks that has led to this situation. A targeted intervention for these for this specific circumstance is what’s needed and it’s needed now.”
In a statement to the BBC, the Treasury said: “We know that being unable to switch your mortgage can be incredibly difficult. But an interest rate cap would have serious market implications and be unfair to other borrowers.
“Many borrowers could now find it easier to switch to an active lender or continue interest-only payments, thanks to recent rule changes by the Financial Conduct Authority.
“We’re committed to finding practical and proportionate options to address this issue and will set out further steps shortly.”
Many of the trapped borrowers took out high loan-to-value mortgages before the 2008 financial crash – something the government is again encouraging in Budget measures introduced last week designed to support mortgages worth 95% of the value of the property they are used to purchase.