The Financial Ombudsman Service (FOS) has seen a rise in mortgage mis-selling, This is especially true in the case of interest-only mortgages. Here’s what you need to know and how to identify if you’ve been mis-sold.
What is an interest-only mortgage?
An interest-only mortgage is when the borrower makes monthly repayments to cover the interest accumulated during the mortgage term. The capital balance remains at the original level. At the end of the term, the borrower pays back the capital balance. The balance will be paid off usually with savings, an investment, pension or the sale of another home.
How are these regulated?
Mortgage lenders and brokers are subject to the Mortgage Conduct of Business (MCOB). This is essentially a handbook of rules they must follow when advising and selling mortgages to borrowers.
When selling interest-only mortgages the MCOB states that interest-only mortgages must be ‘affordable’ and monthly repayments must be ‘reasonable’ for the buyer. The mortgage adviser will review the borrower’s personal finances to create an affordable and reasonable plan.
Many borrowers were led to believe that rising housing prices would mean they were able to repay their loan at the end of their term. However, due to changes in the housing market many interest-only borrowers have no way to repay their loan at the end of their term.
How did the mis-selling occur?
Borrowers were advised that they could afford monthly repayments for houses that were too expensive for them. Many borrowers did not understand that they would never own their home at the end of their term. As a result of this, many will now be in a worse financial position than when they took out the original mortgage.
Borrowers now have to turn to their pension funds or move out of their family home. This is despite the fact that they have made payments for the last 25 years.
In last three years, the FOS has upheld around one in five interest-only mortgage mis-selling complaints. Around 300-400 complaints are made a year.
In many cases, the FOS ruled that the borrowers were due compensation after incorrectly being advised to take out interest-only mortgages by their advisor. This is because there was no suitable repayment mechanism in place without putting the borrower at more risk.
In 2013 the FCA found that 2.6 million interest-only mortgages would be due for repayment over the next 30 years. This means there could be an even greater influx of complaints to the FOS.
If you think you received unsuitable or incorrect advice that resulted in you getting an interest-only mortgage get in touch with us. We can offer a free consultation to see if you’re eligible for compensation.