Barriers to Switching from Vulture Funds - Help needed

[Mark Coan]

Hi All, I need your help.

As has been outlined on other threads there are around 95,000 mortgage holders with 'vulture funds' also known as closed funds (lenders that don't issue new business). As I understand it based on the Central Bank data of these almost half are paying the full outstanding amounts with no arrears.

In theory these mortgage holders should be able to switch to open funds (retail lenders) and get better rates. However to do this you must pass the new lenders affordability tests, despite the fact you are already probably making repayments higher than those with the new lender which is why you want to switch.

Based on the conversations we have had with customers in the last month, I believe there are a lot of folks with closed funds are struggling to pass these tests currently making them 'mortgage prisoners' despite being arrears free. Further, I believe there may be a valid argument to have these affordability tests changed for customers who have consistently shown they can make higher repayments with closed funds already. In the UK the FCA already acted to support this for UK mortgage prisoners.

It would really help those making the case for change if people from this group who have tried to switch could share their situation on this thread, for clarity if they are arrears free for over 5 years and making repayments on the full outstanding loan. (I'm not ignoring the customer group who are in arrears, but that will require a different interventions so is not the focus for this thread).

Typically the issues the lenders cite for not taking this business are

• Changed personal circumstances (lower income)
• Original loans outside loan to value (EG: original was over 90% LTV)
• Lender stress test taking outside limits even though paying more now
• Mica/property issues

If you were turned down for a switch, was it one of the above, something different and what are your mortgage circumstances now?


Thanks in advance,
Mark

 

[RedOnion]

As has been outlined on other threads there are around 95,000 mortgage holders with 'vulture funds' also known as closed funds (lenders that don't issue new business). As I understand it based on the Central Bank data of these almost half are paying the full outstanding amounts with no arrears.

In theory these mortgage holders should be able to switch to open funds (retail lenders) and get better rates.

Just bear in mind when quoting CBI stats that lots of the non arrears cases are on great tracker margins from lenders that have left the market. Yes, they don't have the opportunity to fix, but many are better sticking with their tracker longer term.

Changed personal circumstances (lower income)

More often than lower income by itself, the changed circumstance is new dependents (children born since mortgage taken out, sometimes coupled with one spouse on reduced or no income).

Further, I believe there may be a valid argument to have these affordability tests changed for customers who have consistently shown they can make higher repayments with closed funds already. In the UK the FCA already acted to support this for UK mortgage prisoners.

I agree completely. And not just for mortgages with funds. There is a flaw in the Consumer Protection Code around stress testing, and we've discussed it previously here. The stress testing is required to protect the borrower from borrowing too much. But for switchers, they're already in debt.

From CPC:
"in the case of all mortgage products provided to personal consumers, the results of a test on the personal consumer’s ability to repay the instalments, over the duration of the agreement, on the basis of a 2% interest rate increase, at a minimum, above the interest rate offered to the personal consumer. This test does not apply to mortgages where the interest rate is fixed for a period of five years or more."

 

[Paul F]

@Mark Coan Here is a list I've put together of reasons why people are not able to switch. (These reasons are not specific to people whose mortgages are with vulture funds.)

Key Post - Some reasons why you may not be able to switch your mortgage

Reasons why you may not be able to switch your mortgage Review the below list to see if there are any reasons why you might not be able to switch to another lender at the moment. But also ask yourself if any of the following reasons might apply to you in a few years' time. If you switch now to...

www.askaboutmoney.com

Here are a couple of threads from people who successfully switched from Pepper, in case they are of any use.

Key Post - I managed to switch from Pepper before they increased my rate to 6.5%!

Current lender: Pepper Outstanding mortgage balance: €190000 Approximate value of your property: €400000 The date you started your fixed-rate… not fixed How many years you fixed for: N/A Your current mortgage interest rate: 4.69% Your current monthly repayment: €1500 Your property's BER: B3...

www.askaboutmoney.com

I am glad I switched from Pepper

I posted this on another thread back in Sep’22. (Original info copied below) Had a 1.5% tracker with Pepper and ECB rates had gone up a couple of times so I wanted to fix to keep monthly repayments down. I ended up fixing in Dec’ 22 for 4yrs @ 2.2% with BOI. Brendan was recommending I avoid...

www.askaboutmoney.com

 

[Mark Coan]

I agree completely. And not just for mortgages with funds. There is a flaw in the Consumer Protection Code around stress testing, and we've discussed it previously here. The stress testing is required to protect the borrower from borrowing too much. But for switchers, they're already in debt.

From CPC:
"in the case of all mortgage products provided to personal consumers, the results of a test on the personal consumer’s ability to repay the instalments, over the duration of the agreement, on the basis of a 2% interest rate increase, at a minimum, above the interest rate offered to the personal consumer. This test does not apply to mortgages where the interest rate is fixed for a period of five years or more."

Agree, this barrier is the one that I think we might be able to change, by getting it removed for switchers or at least for those coming from closed funds. What I need data on to help with this though is how many are mortgage prisoners due to this stress test and/or banks affordability calculators. In both cases I believe there may be a common sense argument that, they have proven they can pay at higher rates, so let them switch to rates that are more affordable than their current. If we could get some examples of folks being turned down for a switch on this basis it would help greatly.

Here are a couple of threads from people who successfully switched from Pepper, in case they are of any use.

Key Post - I managed to switch from Pepper before they increased my rate to 6.5%!

Current lender: Pepper Outstanding mortgage balance: €190000 Approximate value of your property: €400000 The date you started your fixed-rate… not fixed How many years you fixed for: N/A Your current mortgage interest rate: 4.69% Your current monthly repayment: €1500 Your property's BER: B3...

www.askaboutmoney.com

I am glad I switched from Pepper

I posted this on another thread back in Sep’22. (Original info copied below) Had a 1.5% tracker with Pepper and ECB rates had gone up a couple of times so I wanted to fix to keep monthly repayments down. I ended up fixing in Dec’ 22 for 4yrs @ 2.2% with BOI. Brendan was recommending I avoid...

www.askaboutmoney.com

Thanks Paul, that's helpful. We have also had several cases ourselves that we have been able to get switched from Pepper and Start, but those customers were fortunate enough to have high disposable income. We have had more cases though where despite no arrears and the customer already consistently making payments above the potential repayment post switch, we can't get the customer to pass the lender affordability tests. This seems a nonsense to me and that's why I'd be very interested if other brokers or vulture fund customers trying to switch have had the same experience.

 

[Brendan Burgess]

We have had more cases though where despite no arrears and the customer already consistently making payments above the potential repayment post switch, we can't get the customer to pass the lender affordability tests. This seems a nonsense to me

Hi Mark

Not sure it's nonsense from the lenders' point of view.

At a time of high and increasing mortgage rates, the lenders need to be more conservative.

And unless these loans were originally with Bank of Scotland or Danske Bank, they have had problems paying their mortgage in the past. Even if it's wiped off their credit record after 5 years, it is probably still a good predictor of problems.

Brendan

 

[Paul F]

Based on the conversations we have had with customers in the last month, I believe there are a lot of folks with closed funds are struggling to pass these tests currently making them 'mortgage prisoners' despite being arrears free. Further, I believe there may be a valid argument to have these affordability tests changed for customers who have consistently shown they can make higher repayments with closed funds already. In the UK the FCA already acted to support this for UK mortgage prisoners.

@Mark Coan Do you know what the FCA's change means in practice? Does it mean that the lenders are allowed to waive the Central Bank stress tests (and the lenders' own affordability tests) for such borrowers? Or does it mean that the lenders are obliged to waive both of these tests?

From CPC:
"in the case of all mortgage products provided to personal consumers, the results of a test on the personal consumer’s ability to repay the instalments, over the duration of the agreement, on the basis of a 2% interest rate increase, at a minimum, above the interest rate offered to the personal consumer. This test does not apply to mortgages where the interest rate is fixed for a period of five years or more."

@RedOnion Do I understand correctly from the last line that if a borrower is currently with a vulture fund and they apply for a 5-year or longer fixed rate with another lender, they "only" have to pass the lender's own affordability tests (but not the Central Bank's 2% stress test)?

I realise that the distinction is probably irrelevant in most cases, since I assume that the lenders' own affordability tests are probably now stricter than those of the Central Bank – but I just want to make sure I understand the rules correctly.

@Mark Coan and @RedOnion and others: What do affordability tests typically look like?

 

[Mark Coan]

Not sure it's nonsense from the lenders' point of view.

At a time of high and increasing mortgage rates, the lenders need to be more conservative.

Maybe not nonsense, but certainly a blanket approach that leads to some being trapped who don't need to be. As an example, let's take someone who was sold to a closed fund, never went into arrears (BOSI etc..) and are making repayments at 5-6% on a variable right now.

A typical open lender product of a 4 year fixed at around 3% with a follow on of around 3.5% will reduce their repayments considerably and logically then also their risk of default from where they are now.

As I understand it they have to pass the lenders own affordability tests and a 2% stress test under the CPC on top of that. As you say it's up to the lender to set the threshold as to what affordability makes commercial sense for them, but why the additional regulatory hurdle?

It seems to me the 2% hurdle has the exact opposite result to that intended trapping customers and making them more likely to default?

The two things that would be helpful to understand is 1) Is this how the stress test works in practice? 2) If so is this actually stopping customers from moving away from closed funds? If so it may make sense for all involved to have the CPC changed to help the customers who are being trapped by this additional hurdle.

Keen to hear any views on this, the experience of customers and also any info on how the FCA change in the UK actually played out, my understanding is that as well as removing the stress test the FCA also encouraged lenders to make their tests more nuanced to accept more of these customers.

I may have the wrong end of the stick, but if not maybe we can find a win win here for at least some mortgage prisoners.

 

[Gordon Gekko]

Why should private companies be forced to take on someone else’s customers?

 

[RedOnion]

@RedOnion Do I understand correctly from the last line that if a borrower is currently with a vulture fund and they apply for a 5-year or longer fixed rate with another lender, they "only" have to pass the lender's own affordability tests (but not the Central Bank's 2% stress test)?

Correct. The CPC doesn't require the 2% stress. However, in practice lenders still apply it, I know when UB were lending they used a 7 year rule.

 

[Brendan Burgess]

As I understand it they have to pass the lenders own affordability tests and a 2% stress test under the CPC on top of that. As you say it's up to the lender to set the threshold as to what affordability makes commercial sense for them, but why the additional regulatory hurdle?

It seems to me the 2% hurdle has the exact opposite result to that intended trapping customers and making them more likely to default?

Hi Mark

If you are looking at it from a customer's perspective, you are right.

But a lender must set its own criteria which cannot be looser than the Central Bank's but can be tighter.

Brendan

 

[Mark Coan]

Why should private companies be forced to take on someone else’s customers?

They shouldn't and I don't believe that's what the FCA did in this case, as far as I can tell from my investigation on this so far is they did two things. 1) Removed the regulatory mandated stress test for 'mortgage prisoners', lenders of course could still apply any test they want at their discretion. 2) Established a working group with all 'open' lenders to identify the potential commercial opportunities to service these customers. As I understand it, lenders were as a result able to switch a number of mortgage prisoners as a result and still make a commercial return on them.

I'm hoping we can get some additional case studies and information posted here from current 'mortgage prisoners' to see if a similar approach is worth exploring here.

 

[Mark Coan]

Interesting comments from Karl Deeter in this mornings Indo article here about equity release being an option for some mortgage prisoners. I think the Equity Release product @ 6.25% fixed for life is a very good product for some.

There are two obvious drawbacks however, 1) You have to be over 60 and you will only get 15% of the value of the property at that age (16% @ 61, 17% at 62 etc..) 2) You can only pay a maximum of 10% down per year, so you may lose quite a lot of equity if you want to pass on your home to your estate.

Is there any data on the average age of customers with closed funds?

 

[Nidge1]

Hi I’ve just signed up after finding a link to this thread, we are with pepper at the moment unfortunately and finding them a nightmare to deal with, have the mortgage 15 years and have never missed a payment but can’t switch due to not meeting the necessary requirements, paying over 8% interest is just soul destroying to be honest and no sign of a way out, have an appointment with mabs in a few weeks but not expecting any miracles

 

[Mark Coan]

Hi I’ve just signed up after finding a link to this thread, we are with pepper at the moment unfortunately and finding them a nightmare to deal with, have the mortgage 15 years and have never missed a payment but can’t switch due to not meeting the necessary requirements, paying over 8% interest is just soul destroying to be honest and no sign of a way out, have an appointment with mabs in a few weeks but not expecting any miracles

Hi @Nidge1, thanks for sharing. Would i be right in thinking you have attempted to switch and were turned down because of affordability or were their different issues?

 

[REDRUNNER]

I have my mortgage since 2006 and never missed a payment, I restructured to an increased term when our kids were born for a more affordable rate with KBC homeloans. They sold us to pepper in December 2021, KBC allowed me to fix for 5 years @ 2.6% before they sold the loan (because the LTV was under 45% I’ve 3.5 years left on my fixed rate, I’ve tried switching to every lender out there. The kids and my wife’s part time income are the main barrier, my work salary is 31000 my overtime and her carers benefits are not taking into account. I’ve been told by AIB the criteria is that a family should have over 4000 per month to live on….and that’s after any mortgage and loan repayments.

 

[Nidge1]

Hi @Nidge1, thanks for sharing. Would i be right in thinking you have attempted to switch and were turned down because of affordability or were their different issues?

Hi Mark yep it was just that I didn’t have enough spare income after all the bills were paid, I actually applied for a 5 year fixed rate at 2% last year through a broker but was refused as I didn’t pass the stress tests yet here I am still managing to pay pepper 8% without fail! I know the banks have to have their rules and regulations but I just wish there was a way for people like me to be given a chance to get away from pepper somehow. I have a completely perfect credit history with all sorts of loans and finance paid off without fail over the years yet because I dont tick all the boxes in the banks they won’t take a chance on me

 

[REDRUNNER]

I have my mortgage since 2006 and never missed a payment, I restructured to an increased term when our kids were born for a more affordable rate with KBC homeloans. They sold us to pepper in December 2021, KBC allowed me to fix for 5 years @ 2.6% before they sold the loan (because the LTV was under 45% I’ve 3.5 years left on my fixed rate, I’ve tried switching to every lender out there. The kids and my wife’s part time income are the main barrier, my work salary is 31000 my overtime and her carers benefits are not taking into account. I’ve been told by AIB the criteria is that a family should have over 4000 per month to live on….and that’s after any mortgage and loan repayments.

The balance on our mortgage is 166,000, the maximum I can borrow is 108,000 based on 3.5 times my salary, but even if the principal was low enough to match that 2 dependents would still prevent me from switching. Are there any politicians fighting our corner on this issue, or are they too afraid to speak out against these Vulture funds?

 

[Whazzuupp]

Also I found the first letter I got off pepper today and they say you have to stick to the terms and conditions of your mortgage offer....is this there offer or the original letter who you took out mortgage with