FSA warns lenders over interest-only mortgage contracts

12 January 2012 12:22 pm | By Natalie Thomas

The Financial Services Authority has warned lenders over the wording they use in their contracts for interest-only mortgages.

The FSA has been considering terms in interest-only mortgage contracts that allow firms to switch consumers from an interest-only mortgage to a repayment mortgage.

It believes some ‘switching terms’ in standard consumer contracts may pose a risk of being considered unfair, or of not being expressed in plain and intelligible language, under the Unfair Terms in Consumer Contracts Regulations 1999.

It says if a court deemed a term to be unfair under the regulations, the term would not be binding on the consumer.

This might result in the firm being unable to switch the consumer from an interest-only mortgage to a repayment mortgage.

Also, if a court deemed that a term was not written in plain and intelligible language, under the regulations the court could interpret it in favour of the consumer.

Under the regulations a term is unfair if it causes a significant imbalance in the rights and obligations of the parties to a consumer’s detriment, contrary to the requirement of good faith.

It says a switching term is likely to be unfair under the regulations if it gives the firm too broad a discretion to determine when the switching term will apply.

The regulator says switching terms are unlikely to be expressed in plain, intelligible language where the terms (i) are not clear about when a firm’s right to switch a consumer onto a repayment mortgage arises and/or (ii) fail to define key phrases in the contract which specify when the right to switch exists.

The FSA has warned firms to ensure their contract terms are not unfair and that they are drafted in plain, intelligible language by considering the requirements of the regulations.

It has warned firms that ultimately only a court can determine whether or not a term is unfair.

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