The UK Government made £2.4bn when thousands of mortgage borrowers became “mortgage prisoners”, according to a new report funded by Money Saving Expert Martin Lewis.

Mortgage prisoners are unable to move to a more affordable home loan despite being up to date with their mortgage payments. They are trapped because either they took their mortgage out before the financial crisis and now do not meet stricter lender criteria introduced after the crash, or their lender is inactive or unauthorised to offer new loans.

According to the report from the London School of Economics (LSE), loan portfolios from failed mortgage lenders after the financial crisis were taken into Government ownership and transferred to the Government-owned UK Asset Resolution (UKAR) in 2010.

UKAR then progressively disposed of these loans. The entity has fully repaid the loans and surplus funds are being distributed, with £48.5bn over the organisation’s lifetime, and the report said that the sale of UKAR portfolios has generated £2.4bn surplus.

“It might well be argued that this gives sufficient headroom to allow government to step forward and help struggling borrowers with ex-UKAR loans,” the report said.

The report added that in 2009 the government acknowledged that selling the mortgages to inactive lenders had the potential to “severely harm” consumers but did not take any action.

It noted that, over the past year alone, monthly mortgage rates had increased from 4.5% to 8.29%, and that mortgage prisoners had “suffered financially, mentally, and physically for more than a decade”.

Selling borrowers into poverty

Lewis said that the report laid out “starkly” that the government sold these borrowers into poverty “knowing it could cause them harm, and made billions doing it”.

“The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations,” he added.

Lewis said: “When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.

“The government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers.”

Rachel Neale, from the UK Mortgage Prisoners group, thanked Lewis for funding the report.

She said: “The report also confirms what UK Mortgage Prisoners has always known, that harm and detriment to borrowers caused by the sale of these mortgages was disregarded by government as far back as 2009 when it opted not to act to protect borrowers.”

Four proposed solutions

The report proposed four solutions to mortgage prisoners, which it said could cost between £50m and £347m over the next decade depending on take-up.

1. Financial advice

The first solution is offering free comprehensive financial advice for all prisoners,  around 200,000 closed-book borrowers.

The report recommended that all the borrowers should be contacted individually to access “comprehensive and holistic financial advice” around mortgages, debt, benefits and income.

The advice would be paid for by the government and delivered through firms like Citizens Advice and StepChange, with complex cases being referred to specialist finance advisers.

2. Interest-free equity loans to pay off NR’s Together loans

The second solution was interest-free equity loans to clear the “unsecured element” of Northern Rock’s Together loans.

The product was taken out by many mortgage prisoners and is made up of a 95% loan to value (LTV) loan and a linked unsecured loan of up to 30% of the value of the property.

The report said that the interest goes up “dramatically” upon remortgaging, making it a “particularly toxic product”.

LSE said that the secured and unsecured parts of these loans could be “uncoupled” by clearing the unsecured element through a second charge loan product offered by the government. This would remove some barriers to remortgaging and free some mortgage prisoners.

It recommended that it be interest-free for the first five years and have no requirements for regular repayments.

3. Equity loans

LSE also recommended that the government should offer equity loans, similar in structure to the Help to Buy scheme, for those with more “substantial arrears”.

The equity loan would be a maximum of 40% of the value of the property, or 20% elsewhere, and could be used to pay down the mortgage and other existing debt.

Borrowers with interest-only loans could be shifted to part loans, where parts of the repayment goes against the capital.

4. Government guarantee

The fourth solution focuses on a government guarantee for active lenders to offer mortgage prisoners new mortgages.

It pointed to the Mortgage Guarantee Scheme, which allowed high LTV lending to be maintained.

The report noted that the government could offer something similar for mortgage prisoners who have done the above, which it would make more attractive to mainstream lenders and release them to the open market.

Of the proposals, Neale said: “The proposed solutions need to be considered in detail, and urgent action is required now before more homes and lives are lost.”