Interest-only mortgages – the next mis-selling scandal?
Did you know that if you have an interest-only mortgage, you may have been mis-sold?
Recent reports by the legal tech company, ME Group have revealed that potentially hundreds of thousands of interest-only borrowers could be owed compensation after being mis-sold interest-only mortgages by brokers. And the Financial Ombudsman agreed. It seems that many advisors breached regulatory rules on suitability and affordability when selling interest-only mortgage products before the financial crisis of the late 1980s and early 1990s.
Interest-only mortgages – what’s the problem?
When you take out an interest-only mortgage, your repayments only cover the interest on the mortgage loan. That means you will need a separate means of paying off the capital. I.e. the money you’ve borrowed to buy the property, at the end of the mortgage term.
Many homeowners are now finding that they can’t pay off the capital part of the mortgage and feel that an interest-only mortgage wasn’t the best option for them.
So, who’s responsible for mis-selling interest-only mortgages?
In many cases, the fault lies with the mortgage broker or the lender who sold you the mortgage in the first place. It’s the seller’s responsibility to make sure that you will be in a position to pay off the mortgage when the term ends.
How were interest-only mortgages mis-sold?
So, if you have an interest-only mortgage, were you mis-sold?
- If you were given information about an interest-only mortgage and how it works, but you were then left to make your own decision, you probably weren’t mis-sold.
- If you were advised to take out an interest-only mortgage, a mis-sale decision would depend on whether that kind of mortgage was suitable for you at the time of the sale, rather than in your current circumstances.
- If you were wrongly advised to take out an interest-only mortgage and you’ve lost out because of it, you could be entitled to a claim for compensation.
If you’re not sure whether you’ve been mis-sold, talk to a reputable claims management company or the Financial Ombudsman Service (FOS) for advice.
The Financial Ombudsman Service ruling
Over the past few years, the Financial Ombudsman Service (FOS) has upheld roughly one in five of the three to four hundred interest-only mortgage mis-sale complaints that they receive each year.
Most commonly, mis-sale cases that are upheld are due to borrowers being incorrectly advised to take out interest-only mortgages when there was no suitable, risk-free repayment strategy in place. In these cases, borrowers were typically relying on risky overseas property investments to provide sufficient funds to pay off the mortgage.
Complaints of interest-only mortgage mis-sale that failed include:
- A case in which the borrower had taken out an interest-only mortgage to purchase an overseas property. In this case, the FOS ruled that the claimant could have downsized to raise funds had he needed to.
- In one case where the borrower had used an interest-only mortgage to buy property abroad, the FOS ruled that the complainant had other means of repaying the loan, so the complaint was not upheld.
- The FOS failed to uphold a case where the complainant had been advised to take out an interest-only remortgage for debt consolidation purposes. Although the borrower ended up paying more interest overall, the FOS ruled that the advice received by the complainant had not been unsuitable.
So, as you can see, unlike PPI and PBA mis-sale cases, the mis-selling of interest-only mortgages is not as clear-cut.
If you were advised to take out an interest-only mortgage, even though you had no apparent means of paying back the capital loan at the end of the mortgage term, you might have been mis-sold.
So, it’s well worth taking the advice of an experienced financial advisor or claims management company like Crystal Legal if you think you may have a valid compensation claim.