For most people, taking out a mortgage is likely to be the biggest financial commitment they will make.
It’s not surprising then that giving mortgage advice became regulated by the Financial Services Authority (FSA), which is now regulated by the Financial Conduct Authority (FCA) in October 2004. Since then mortgage advisers have had to ensure that the advice they provide is suitable. This includes whether you, as the customer can afford the mortgage, whether it meets your needs and whether it is the most suitable from all the mortgages that the adviser can access.
Unfortunately, there’s a lot of evidence to show that many people have not received the most suitable advice. People can receive incorrect or misleading mortgage advice in a number of ways and if you have been mis-sold a mortgage or mortgage-related product then we may be able to help.
The FSA (Financial Services Authority) paper, ‘Mortgage Market Review: Responsible Lending’, released in July 2010, identified mortgage mis-selling as a real issue that came to a head in the run up to the recession.
While millions of people have mortgages that they are very happy with, a significant number have been left in desperate situations following poor lending by mortgage companies. As such, many borrowers are struggling to meet their repayments and are facing significant arrears and even repossession.
So how did this happen? It appears that, in response to a rising number of mortgage complaints, the FSA found that brokers and lenders have been breaking the rules and lending money to vulnerable people who are not able to service their debt.
What Are The Ways In Which My Mortgage May Have Been Mis-sold?
The adviser didn’t take account of changes in interest rates and how these might affect you.
For example, if you took out a fixed rate mortgage, your payments will have been set at a fixed amount for a period. Once the fixed rate ended, your payments will have changed to the standard rate that was offered by the lender. In many cases, this will have meant that your payments would have increased substantially. If the adviser didn’t assess the likely increases you could face and whether you would be able to afford them, your mortgage may have been mis-sold.
Your adviser was required to take account of any known changes in your circumstances.
For example, let’s assume that you took out a mortgage at age 45 for 25 years. If you are going to retire at age 65 this means that you will still have another 5 years left on your mortgage. The adviser should have established how you will be able to continue to afford the mortgage after you retire.
If you undertook a re-mortgage to repay your existing debts, then your adviser should have considered the costs that would be incurred because of lengthening the period of your debt and the implications of making a loan that was unsecured become secured against your home.
For example, you have a car loan that has 3 years left to run and you re-mortgaged to repay this loan. Whilst re-mortgaging probably reduced the amount you had to pay each month, it also means that you are really repaying the loan over the term of your mortgage, which could be 20 or 25 years. You’re also going to be paying interest over this longer period. All in all you’ll usually be paying more in the long run.
The adviser sold a “sub-prime” mortgage where you could have obtained a “high street” mortgage.
A sub-prime mortgage may be offered where your credit rating is poor or shows that you have experienced difficulties with payments in the past. However, it may also be offered if your income is below the level that a mainstream lender will accept, or you require a particularly high loan against the value of your property (LTV). Sub-prime mortgages usually have higher interest rates. Therefore, if you did not fit into one of the above categories then you may have been mis-sold if the adviser arranged a sub-prime mortgage for you.
The adviser arranged a self-certification mortgage for you even though you were employed and had proof of your income.
A self-certification mortgage is one where you generally do not have to provide evidence of your income to the lender. As a result, the lender takes more risk in lending to you and therefore charges a higher rate of interest. If you didn’t need a self-certification mortgage but were advised to take one, you may have been mis-sold.
Another concern around self-certification mortgages is that some advisers have encouraged borrowers to inflate their income to enable them to get a mortgage in cases where their income would otherwise be too low. This is called mortgage fraud.
The adviser should also have assessed whether you preferred an “interest-only” mortgage or a “capital and interest” mortgage.
A “capital and interest” mortgage is ideal for borrowers that don’t want to run the risk of having money left to pay on their mortgage at the end of the term. This is because you repay interest on the mortgage as well as an element of capital back to the lender with every payment. The lender works out what you need to repay each month to do this and so if you don’t miss any payments, the mortgage will be paid off.
In contrast to this, an “interest-only” mortgage is exactly what it says. You only pay interest on the outstanding mortgage to the lender. This means that you must find another way of repaying the actual debt, by using what’s called an “investment vehicle”. Common products used are endowments, an ISA, a unit trust, or even a pension. Whilst an interest-only mortgage usually means that you pay lower amounts each month it does carry the risk that the investment vehicle you use is not guaranteed to repay the mortgage at the end of the term. Therefore, your adviser should have discussed with you whether you were prepared to take this risk.
I took my mortgage out directly with a lender – do the same principles apply?
Yes, if your lender gave you advice about the suitability of a mortgage, then it was also required to comply with the same principles and rules.
How To Spot Signs Of Mortgage Mis Selling
There are various ways in which mortgages have been mis-sold. These include:
Interest Only Mortgages
Although these seem to be a cheaper option in the short-term, you will end up paying significantly more in the long-run. This should have been explained to you by your broker or lender. They should have also given examples of the cost of a Capital and Repayment mortgages and explained to you that you may have to switch your mortgage to a Repayment mortgage at some stage.
Repayment Investments (Such As Endowment Policies)
Such investments are designed to pay off the mortgage when it is finished however there are cases when they fall short and a further lump sum is required.
If you were advised to move all your loans and credit cards etc. onto your mortgage but were not informed that, although your monthly outgoings would be initially lower you would be lengthening the term of your debt and increasing the interest, this is a form of mortgage mis-selling.
Was your household budget assessed along with your income and various outgoings, therefore working out your ‘disposable income’? It should have been – if it wasn’t then you may well have been sold a product you couldn’t afford.
You may have been encouraged to take out a ‘Self Cert’ or ‘Fast Track’ mortgage – popular with brokers due to their high commission – despite being able to prove your income with through payslips or audited accounts.
Your Mortgage Post-Retirement
Do you know if your mortgage will run past your retirement? If so, do you know how you will meet the repayments?
Right To Buy Mortgages
Under the ‘Right to Buy’ scheme, many people have been unaware that their mortgage payment would be much higher than their rent, that they would become responsible for maintenance costs and that they would lose their Housing Benefit.
‘Sub Prime’ Mortgages
These mortgages, which cost more than those on the high street, are recommended for borrowers who have a poor credit history, CCJ’s or low credit score. You may well have been advised to purchase one even if your credit rating was fine.
High Broker Fees
Did you pay an unreasonably high fee to your broker? Did you know how much it would be or was it added to your mortgage without you knowing thus meaning you are paying interest on it?