Interest-Only Mortgage Compensation
If you took out an interest only mortgage to buy your home and feel that the risks and suitability for your situation were not properly explained to you, then you could be one of the hundreds of thousands of homeowners eligible for interest-only mortgage compensation. We look at the current situation for homeowners, who can claim compensation and how.
What is an interest-only mortgage?
An interest-only mortgage is a form of home loan where you pay off just the interest on your mortgage each month, but you don’t have to repay on the amount you’ve borrowed until the end of the mortgage term. It means your monthly repayments are much lower than with a traditional repayment mortgage. But you aren’t paying off any of the initial amount you borrowed.
This means that when the mortgage ends you need to have alternative funds to repay the capital that you borrowed. The problem is a lot of people on interest-only mortgages haven’t got any way of repaying the debt. Or the savings vehicle they did have in place has failed to deliver the returns they had expected.
According to the Financial Ombudsman Service 1.67 million people have an interest-only mortgage. Of these many are at risk of losing their home when their mortgage term ends as the only option for repaying the capital owed and settling their debt will be to sell their home.
You can find out more with our guide to interest-only mortgages.
Mis-sold Interest Only Mortgage Compensation
Not everyone with an interest-only mortgage is due compensation. If you knew exactly what you were taking on, and it was suitable for your personal circumstances, then it is highly unlikely that you have a case.
The problem is mortgage brokers received big commissioned for selling interest-only mortgages so they were pushed hard. There are also concerns that borrowers were encouraged to bundle all their debts (credit cards, loans etc) onto their interest-only mortgage without understanding that it could result in them repaying a lot more interest.
The FOS conducted a review of interest-only mortgages in 2013. It found that the vast majority of homeowners had understood the terms of their interest-only mortgage when they applied for it. It also stated that there was little evidence of mis-selling.
But the FOS are now receiving a growing number of complaints from people who believe their home loan was mis-sold and that they are due interest-only mortgage compensation. It receives 300-400 complaints a year and upholds around one in five.
The number of complaints is expected to explode in coming years as hundreds of thousands of interest-only mortgages come to an end and borrowers have to face facts and sell their homes to repay their debts.
You may have a case to complain if you answer no to any of these questions:
- Did your lender/broker make it clear to you that you were only paying off the interest each month?
- Were you made aware that you would need to repay the capital when the mortgage came to an end?
- Were you shown examples of the difference in monthly repayments between a repayment mortgage and an interest-only mortgage?
- Was it explained that you could have to switch to a repayment mortgage, rather than interest-only, if you couldn’t repay the capital?
- Were you asked to explain how you would repay the capital on the mortgage?
- Were the risks of an interest-only mortgage explained to you?
- Could you afford to save up the money to repay the capital when you took out the mortgage?
- Has your lender provided you with options after you contacted them to explain you were worried about repaying the capital?
The FOS website includes a range of case studies giving examples of complaints they’ve received and the action they took.
Who is responsible?
If you feel you are owed interest-only mortgage compensation, then you need to complain. But first you need to work out who was in the wrong.
If you applied directly to a mortgage lender then that is who you should complain to. But if you used a mortgage broker then they are responsible for making sure you got a suitable home loan.
Twenty years down the line it may be hard to remember so go through your paperwork. Try to find evidence that shows you were mis-sold your mortgage. This could be paperwork that shows you received financial advice when you took out your loan. Alternatively, it could be something that shows the risks of an interest-only mortgage were not outlined for you.
How do I complain?
The first step is to write a letter to your lender or broker. You need to explain why you are complaining and ask for a response within 14 days.
Also, ask them for a copy of your mortgage file so you can see all the paperwork they hold and can check if there is anything that can support your claim.
How much time do I have to complain?
We have heard of numerous instances where people have been fobbed off by their lender or broker. They tell people that, under consumer law, you only have six years to complain after taking out the mortgage. This isn’t strictly the case.
The FOS has said that: “if we decide someone could only reasonably have known within the last three years that there might be a reason to complain, we’ll usually be able to help.”
So, it’s worth making a complaint regardless of how long you’ve had your mortgage.
What if I’m unhappy with the response?
If you’ve approached your lender or broker about interest-only mortgage compensation and aren’t happy with their response complain to the FOS. You have to give your provider eight weeks to respond to your complaint. When the time is up you can take your issue to the ombudsman.
The FOS is free to use, and its rulings are binding. You can complain via the online form on its website or by calling 0800 023 4567.
Can someone do all this for me?
The amount being paid out in each case for interest-only mortgage compensation can be sizeable. In one example, a mortgage broker was ordered to pay out over £30,000 to cover the amount a tied investment was supposed to pay out to help clear the mortgage.
As a result of the large sums involved, claims handling firms are springing up that are happy to do the legwork for you.
This could save you a bit of time, but in return for writing a couple of letters on your behalf they will take a hefty chunk of your compensation. We’d recommend doing the work yourself. That way you get to keep hold of all of your interest-only mortgage compensation.