According to the Financial Ombudsman Service, 1.67 million people have an interest-only mortgage and many will be due to expire in the next few years. Unfortunately, lots are at risk of losing their home when their mortgage term ends as the capital repayment mechanism (if it ever existed) has failed meaning the only option for repaying the capital owed and settling debt will be to sell the property.
Let’s take the example of Mr. A. This demonstrates one of the ways in which an interest-only mortgage can be mis-sold.
Mr. A- The Facts
Mr. A is a retired widower, aged 75. He has no mortgage, having paid this off some years earlier. He has no unsecured debts or liabilities. He is in receipt of a Pension proving average earnings of £6000.00 before tax. He is also in receipt of a state pension proving around £180.00 per week before tax. He has a verifiable gross income of around £15,000 before tax. He has no savings.
An opportunity to invest?
In early 2015, Mr. A was provided an opportunity to invest in an overseas development in Thailand- it was particularly attractive for him because the introducer who made the call set out that if he did invest then they would pay all exit fees and ongoing maintenance costs in respect of a timeshare he was seeking to dispose of. The introducer stated to Mr. A that they would arrange finance for the investment property in Thailand and noted on the property reservation form that Mr. A required 100% finance.
The mortgage advice
Shortly after, Mr. A received a call from a regulated mortgage advisor. They knew the purpose of the mortgage following the referral from the introducer and recommended that Mr. A take an interest-only lifetime mortgage of 15 years’ duration to facilitate his investment. A mortgage on these terms was quickly obtained with the mortgage advisor paid a fee from the Lender.
Mr. A fully expected and was told that he would be able to make mortgage payments with income from the investment- he was also told the rental market was buoyant. The repayment vehicle for the capital element of the interest-only mortgage was the sale of the investment property- he was told that the developer had finished many similar projects and that property prices in Thailand were expected to sharply rise.
Events following the mortgage advice
Mr. A paid £65,000 as a deposit for the purchase of the investment property.
Two years later he received notification that the development had failed and the property would not be built. This meant that Mr. A remained liable to pay the interest only mortgage which had 13 years to run and to pay the mortgage balance with no rental income and no repayment mechanism.
The mortgage advisor clearly failed Mr. A in the provision of mortgage advice:
- Mr. A had no experience of off plan, overseas property investment;
- Mr. A had no understanding of interest only mortgages and the risks involved in such transactions- he had never taken out an interest-only mortgage prior to this ;
- The risks involved in the overseas property development were high and this didn’t match Mr. A’s appetite for risk which was low to cautious- there was no basis for assuming that the investment property would be completed and this was Mr. A’s only means of repaying the mortgage.
- The mortgage advisor made negligent statements about the risk profile of the investment, affordability and suitability of the mortgage
Mr. A suffered losses amounting to around £80,000 including the deposit paid, the payments made towards the interest-only mortgage, product fees, mortgage account fees, solicitors fees, land registry fees, advisor’s fees and broker’s fees.
Mr. A would have a claim with good prospects of success at the Financial Ombudsman Service. Given the current financial limit of £160,000 (in respect of acts or omissions by firms before 1 April 2019) he would be able to recoup the whole of his £80,000 provided he had retained relevant paperwork. It is clear that the advice provided by the regulated mortgage advisor was negligent and in breach of the MCOB regulations.
However, he would need to act quickly.
It is generally much more difficult to proceed with claims when more than 6 years has expired since the bad advice.