Only one in 1,000 homeowners have been helped by new City watchdog rules intended to make it easier for borrowers to switch to a better deal. 

Tens of thousands of so-called “mortgage prisoners” have been stuck on expensive mortgage deals since the financial crisis and unable to remortgage onto lower rates because of banks’ strict affordability tests.

In October 2019 the City watchdog, the Financial Conduct Authority, loosened its rules to make it easier for these borrowers to switch to a cheaper deal with another lender. The regulator estimated these changes would help between 2,000 and 14,000 mortgage prisoners.

However, just 200 trapped borrowers have been able to escape their mortgage thanks to the relaxed rules. The FCA admitted this was “fewer than expected” in a report published yesterday, but largely blamed the shortfall on “limited appetite” amongst lenders to help mortgage prisoners. 

The regulator said: “Although removing regulatory barriers to switching helps, the primary barrier to these borrowers switching is the lack of lender risk appetite.” 

The FCA claimed there had been “only moderate engagement” from borrowers themselves. 

Conservative MP Kevin Hollinrake, vice-chairman of the All Party Parliamentary Group on mortgage prisoners, said the failure of the policy meant borrowers were now in need of an “urgent solution”. 

“Mortgage prisoners have suffered enough. It is one thing to change the rules, another thing entirely to get lenders to listen,” he said. “A small number of lenders are stepping forward to help, but frankly the majority have no interest.”

Many mortgage prisoners are former customers of Northern Rock and Bradford & Bingley whose accounts were sold to third parties when the banks collapsed during the financial crisis. The “inactive” lenders are not obliged to offer new, cheaper mortgages to customers, meaning tens of thousands of people have been paying more than market rates.

In extreme cases, borrowers have been locked into rates of more than 11pc while interest rates elsewhere have less than a quarter of that figure. Customers have been barred from switching to another lender, despite most being up-to-date with payments, because of strict post-crisis affordability rules. 

The FCA estimated there were currently 195,000 borrowers on the books of inactive lenders, meaning just 1 in every 1,000 have been helped by the regulator’s flagship mortgage policy. The regulator claimed only 47,000 of these borrowers could be classed as “mortgage prisoners”, as tens of thousands of others have fallen behind with their payments and were now unable to switch. 

However campaigners disputed this figure and said many borrowers had only fallen into financial difficulty because they were being charged too much for their loan. 

Mr Hollinrake warned this approach was too narrow. “We shouldn’t just be looking at helping just those 47,000 who are eligible for switching. Borrowers who are not up-to-date with their payments most likely will be behind because they are paying much more expensive rates. 

“The Government effectively sold them off to those inactive lenders in the first place,” he said. 

Laura Suter, of AJ Bell, said: “The FCA seems to be throwing its hands up at the lack of action in helping mortgage prisoners to shift to better deals and pointing the finger in three directions: at lenders for not being more proactive; at borrowers for not being more engaged; and at the pandemic, for disrupting some lenders’ plans. 

“The buck now passes to the Government and the Treasury to assess what more can be done in the market to help mortgage prisoners who are stuck on poor rates and with disengaged lenders.”