With mortgages becoming regulated by the Financial Services Authority, probably by 2004, one of the areas to which the FSA should pay special attention is transferability.
The ability to move a mortgage from one property to another without penalty is a big selling point – particularly now that such a large proportion of new mortgages and remortgages are signed up on special offers like discounted, fixed or capped rates.
These mortgages almost always have hefty penalties for early repayment and it is imperative that the homebuyer is able to transfer the loan, should they need to move house, without suffering financially. Many fewer concessionary loans would be sold if these mortgages were not transferable.
But are all the lenders being entirely honest about transferability? Some lenders are refusing to transfer a loan to a new property if the homebuyer's income or employment status has changed – even if there have been no arrears on the account. In effect, this means the transferability option is virtually worthless because the borrower has to requalify for the loan.
For example, if the original loan was granted when the person was employed and they are now self-employed, it is highly unlikely that the borrower will be able to meet the requirement to provide three years' audited accounts.
It is also quite likely that in the early days of self-employment their income will have fallen – particularly if they have started up a business which requires capital and new investment.
Similarly, if the homebuyer's loan was based on earnings which included any bonuses or overtime and they are no longer earning these extras, they may well breach the lender's maximum income multiple when they come to transfer the mortgage to a new property.
Brokers have been caught out by this because these qualifications, in some cases, have been introduced without warning, simply being added to the small print without this important change being highlighted.
Needless to say, clients who have been caught out and find themselves having to pay an unexpected penalty have complained to their broker.
And as one mortgage adviser has put it, “even worse, some lenders cost their mortgage, taking into account that a certain proportion of borrowers will not be able to transfer their homeloan, and will have to pay the penalty to go elsewhere. This is totally cynical”.
Where a person's circumstances have changed but they have continued to make the monthly loan repayments, and have proved that even with their changed circumstances they can afford the mortgage, it is little short of sharp practice to refuse to transfer the existing loan to another property.
They are clearly responsible homebuyers – and if they had remained in their home, the lender would never have known that their circumstances had altered.
Where there are no arrears and the borrower's circumstances changed, say, six months ago, the transfer ought to be automatic. At the very least, the mortgage terms and conditions ought to spell out that the loan “may be” transferable, rather than describing it as though it is automatically transferable.
Lenders must have some sanction to refuse transferability if the borrower has run up arrears. But this should be clearly spelt out, itemising the exact conditions under which the loan cannot be transferred – not concealed in the small print.
Perhaps the FSA and the Financial Ombudsman should be taking a look at this in the context of the Unfair Terms in Consumer Contracts legislation.
There are other aspects of transferability too, which brokers would be wise to highlight in their “reasons why” letter of recommendation. Not only do borrowers need to requalify for the loan on transfer but there is no incentive for the lender to offer an attractive deal where a top-up is required.
The lender can offer something pretty uncompetitive, secure in the knowledge that they will collect the penalty if the customer gets fed up and decides to go elsewhere.
As one mortgage broker put it, “borrowers should only look at transferring a mortgage as a last resort because the transferability is hedged about with so many conditions.”