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FOS rulings tell lenders to extend interest-only terms indefinitely

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The Financial Ombudsman Service has told mortgage lenders in at least two cases to extend interest-only terms indefinitely for older borrowers.

The FOS has today published a number of case studies involving complaints made by older borrowers.

In one case, a borrower who had taken out an interest-only mortgage on a 25-year term in his early 70s complained that he thought he had a lifetime mortgage.

The borrower, now in his 80s, was worried he would be forced to sell his home in his late 90s.

The lender had accepted the sale of the property as the repayment vehicle when the mortgage was taken out.

The FOS upheld the complaint and ordered the lender to change the mortgage to one with no set end date, so the capital could be repaid on the borrower’s death.

The FOS says: “We were concerned that the mortgage company hadn’t given personalised advice – taking into account the borrower’s age and circumstances.

“Mr A was now facing the prospect of selling his home at nearly 100 years old – with 15 years of worry in front of him. We didn’t think this was fair.”

In another case, the FOS also recommended the term of an interest-only mortgage be extended “indefinitely” and be repaid upon death.

The borrower, a widow in her 80s, received a letter from her mortgage company explaining her interest-only mortgage was coming to an end.

When she asked for the term to be extended, the lender told her arrangements would have to be made to sell the house if she could not repay the capital.

The customer had taken out the mortgage when she was 75 and her husband had been 70. They had told the lender they did not have arrangements in place to repay the capital at the end of the term.

The FOS says: “We pointed out to the mortgage company that they’d already agreed to lend money to Mr and Mrs R into their 80s – knowing there was no repayment vehicle in place. In our view, Mrs R was in her current position because of their previous lending decision.

“We didn’t think it was fair to now simply say she was too old – and force her to sell her home.”

Lending into retirement has become one of the biggest issues in the mortgage market since the MMR.

Before the rules were rolled out in April 2014, many lenders cut their maximum age limits to 70 or 75, making it more difficult for borrowers to obtain finance if the loan extended into retirement.

More rigorous affordability assessments and a clampdown on interest-only lending has further restricted options for older customers.

The FCA recently called for lenders to develop more flexible mortgage products for older borrowers.

But the Building Societies Association says many lenders do not have the regulatory permissions to convert an interest-only mortgage into a lifetime mortgage.

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. Rt Hon Sir Arthur Streeb-Greebling 1st December 2015 at 9:06 am

    WHY aren’t we told the name of the scurrilous lender concerned Mr Journalist?

  2. It is interesting that the FAMR makes no mention of the fact that there are a huge number of interest only mortgages with no repayment vehicle and does not consider it an issue where consumers need advice…… Consequently the FCA may not focus on this area of concern. Perhaps they should?

  3. How can a borrower’s complaint against the lender be considered legitimate because he failed to read the terms of the mortgage offer and/or failed to notice that they specified a term of 25 years? Or that although he did read the terms of the offer, he then promptly forgot what they were and told himself that they were what he wanted (in this case, an open-ended IO mortgage) but couldn’t actually get? If that’s the stance of the FOS, it’s effectively inviting anyone to put forward a complaint, with a good chance of it being upheld, on the basis that the borrower convinced himself that the terms of the offer were somehow different from what was actually documented. No proof, just an incorrect assumption (or a lie).

    If that’s the case, will the FOS uphold complaints from an investor in an ISA on the grounds that having ignored all the risk warnings in the suitability report, he just assumed that the value of his investment would never go down? If so, then nothing we document will be considered by the FOS to constitute any sort of defence against a completely unsubstantiated claim from a complainant. The same goes for the FOS’s stance towards signed disclaimers of liability from clients insistent upon going against best advice. In any fair society, the response from the FOS would be: You signed it, Mr X. It’s not the fault of the adviser that you didn’t bother to read it before doing so.

    Perhaps this sort of behaviour on the part of the FOS will be one of the subjects addressed in the FAMR.

  4. In many cases the interest payment is less than the cost of renting a comparable house. Getting rid of interest only lifetime mortgages was a big mistake and shouldn’t have been allowed to happen.

  5. Both cases hinge on the idea that it had been made perfectly clear to the consumers that they weren’t taking out lifetime mortgages but because the mortgage company hadn’t given “personalised advice, taking into account their age and circumstances” the complaint should be upheld anyway. Even though there is no indication from the case studies that the customer was getting personalised advice or had paid for it. Is everyone who purchases a financial product now entitled to free “personalised advice”?

    The second seems to be a straightforward case of greed. If you borrow money for 10 years when you are 70 and 75 you know perfectly well you will have to pay it back when you are 80/85. Borrow money on your house for ten years, blow it on cruises and then complain to the FOS, and they’ll make sure you’ll never have to pay it back. (Your family won’t get the house but I doubt you care.)

    There’s another eye-opening case not covered in this article of an elderly woman who gave her nephew a “third party mandate” for her bank accounts after she had a fall and became housebound. You already know where this is going, the nephew emptied the accounts, maxed out the overdraft and took out a personal loan. Who is to blame? And who has to pay back the money? If you said “the nephew”, you disgust me. Clearly the nephew was another vulnerable person, he had learning difficulties, didn’t understand money, he probably has the attention deficit disorder. If you said “the bank”, congratulations, with that kind of fair-minded and caring attitude there is a job for you at the FOS.

    The money is given back (and hopefully someone will now point out to her that you can operate a bank account from your bed nowadays), everybody wins. Except everybody who gets the cost of all this added onto their mortgage and deducted from their interest. But who cares about them.

  6. This is another regulatory train wreck in the making – listen to the CAB and many social commentators. there are 1000’s of borrowers on interest only who could happily continue to pay interest only payments for life – the alternative as caused by MMR and the usual regulatory interference is that the lender is duty bound to review matters at the and of the term and I have seen some truly astonishing results.
    Prior to MMR the CML stated that: In its submission,
    “the CML acknowledges concerns about borrowers having a shortfall at the end of their term, and lenders being exposed to a prudential risk by having a number of borrowers with unknown repayment methods.
    However, the number of borrowers with a shortfall at the end of their term is extremely low, and where this occurs the lender is normally able to arrange an acceptable repayment plan with the borrower. Lenders do not see significant losses from interest-only mortgages, meaning that the majority of borrowers’ repayment methods work” – in other words prior to MMR interference there was NOT a problem so for the FCA to state they want lenders to come up with “more flexible products” is a bit rich given that their usual interference caused the problem in the first place !

    The alternative – kick the borrower out and leave him to the private rental sector and the tax payer picks up the tab for the market rent and thus become more of a burden to the state. This will be particularly true where property values/equity stakes are much lower – although at least by leaving well alone the borrower has at least SOME stake (equity/money) in the property the alternative ? well we don’t need to be a rocket scientist to work that out.

    And lets not forget that there are many more imprisoned by their lender (who are much younger too) forced onto the same train.

    Interest only is and always will be a viable mortgage option probably more viable now than ever given property inflation – everyone except the regulator knows that

  7. Dick could not have said it better myself.

  8. What’s wrong with an interest-only mortgage with the repayment vehicle being ‘sale of property by executors after death of all borrowers’? The lender continues to make money and is assured of payback at the end of life. This is no more of a risk to a lender than any conventional capital repayment mortgage.

    • MMBernie MMHamilton 1st December 2015 at 4:11 pm

      If the lender doesn’t have a date by which they can expect their capital back (i.e. the term of the mortage) they can reasonably expect a higher return (i.e. to charge a higher interest rate on the loan, relative to what would be charged if the term of the mortgage was enforceable).

  9. There once was a man called Wheatley
    Who ruled out interest only completely
    When told he was wrong
    He replied its a ticking time bomb
    And said go away rather neatly

    Well let me tell you there is an even bigger timebomb coming and its been caused by regulatory meddling yet again and directly by the authors of MMR.

    The regulator can have no excuses

  10. What happened to personal responsibility in this country?

  11. peter mulholland 1st December 2015 at 5:12 pm

    Waiting for the case where an interest only comes to the end of the term and he claims he thought it was repayment.
    Will the FOS say the lender should write it off haha

  12. This is so ridiculous. What is a 70-year-old doping taking out a mortgage anyway? When you take a loan it is usual to engage a solicitor. If he was so stupid not to then he’s at fault again, if he did, why didn’t the solicitor make things clear?

    Mortgages for old people and Lifetime Mortgages (equity release) are for those who have been either feckless or stupid during their lifetime. Now they are queuing up to get ripped off by the lenders. Better to sell the house on the open market and trade down debt free.

  13. Doesn’t it make sense to start recording advice meetings?

    • Wouldn’t have done any good in the cases in question. There is no indication that the clients asked for, paid for or thought they were getting advice, they just wanted to borrow money against their home. But the FOS have said that they were entitled to free “personalised advice” from the lender as to the suitability of the loan because… [white noise]

  14. Just goes to show we need to totally rethink lending for mortgages in this country.
    About time there needs to be life time mortgages (not stuck to the usual 25 years etc etc) and at reasonable rates !(like a lot of other countries).

    I cant fathom why we continue to keep getting it so wrong in this country, when it comes to doing anything financial ! government, regulators and yes, some advisers alike !

  15. my position is a little different. iwsa aware that I was taking out an interest only mortgage but was unaware that the that the term was only for 10 years after completion. My vehicle of repayment was the sale of the property, and I intended to put the property on the market in 2014 (mortgage term came to an end in 2017), having made plans to move and thinking that 2+years would be ample time to sell the property. However,before the move could be effected I was diagnosed with cancer. Treatment took the best part of a year, and recovery is still ongoing. I also became registered disabled during that period (spinal arthritis) and became diabetic. Property moves relatively slowly in my neck of the woods, and although my lender has very kindly granted me a three month extension to my mortgage term, this time is running out and my stress levels are rising with deleterious effects on my already precarious health owing to stress and depression. I am pro actively selling my property and do not under any circumstances wish to remain there, since it is now totally unsuitable for my needs due to my physical disability. I just wish to be granted sufficient time in which to sell it since that is the only way I can repay the capital sum borrowed

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