Mortgage lenders could fall foul of treating customers fairly rules if they apply generic lending criteria following a Financial Ombudsman Service ruling against HSBC, experts warn.
The FOS has upheld a complaint against the bank for unfairly rejecting a mortgage application on the grounds of age in the first case of its kind.
A couple in their forties, referred to as Mr A and Ms B, were turned down when applying for a joint £250,000 interest only loan over an 18-year term.
HSBC rejected the application on the basis that Mr A would have been over 65 when the loan had to be repaid.
It said it was entitled to apply a maximum age policy and that it did so to mitigate the reputational risk of allowing customers to borrow into retirement.
But the FOS says the couple’s joint income would have been sufficient to meet the monthly repayments after Mr A reached 65. It says his professional circumstances meant he was unlikely to retire at that age, and in any case he had a final salary pension scheme.
The FOS says: “Rather than considering Mr A and Ms B’s individual circumstances, it seems that the information the bank relied on included untested assumptions, stereotypes or generalisations in respect of age and wasn’t relevant to Mr A and Ms B’s circumstances.”
It adds that HSBC’s risk assessment was “flawed” and “inadequate”.
The FOS concluded the bank did not treat the borrowers fairly by refusing to consider their application “on the basis of Mr A’s age alone”.
The FOS has ordered HSBC to pay the couple £500 for distress. It initially proposed that HSBC reconsider their mortgage application, but has now redacted that as HSBC has significantly changed its interest only lending policy since the couple made their application in 2012.
Law firm DWF partner Harriet Quiney says: “The findings clearly demonstrate that customers must be treated as individuals and, while affordability in retirement is a factor which must be taken into account, lenders cannot rely on broad generalisations to deny mortgages to borrowers.”
She says social trends including divorce, increases in the state retirement age and borrowers delaying buying their first home means there are a “substantial number of borrowers aged 40 and over”.
But she adds: “Where interest only mortgages are concerned, there is clearly an increased focus on repayment and for many people the options in retirement will be reduced. So even if discriminatory factors are removed from the equation, it may still be harder for borrowers in their late 40 and 50s to find mortgages than for those in their 30s.”
Bill Warren Compliance managing director Bill Warren says HSBC’s policy is “blatantly unfair” and the decision could lead to further complaints.
He says: “Other borrowers in their 40s who see this decision will be asking their lender why they have been turned down.
“Lenders must look at the individual circumstances of each borrower. This is a prime example of not treating customers fairly.”
A spokeswoman for HSBC says: “As a responsible lender, we need to ensure our customers’ ability to repay their mortgage. With interest only lending we also need to understand how a customer will repay the capital when the mortgage matures.
“Regulatory requirements to show responsible lending and the repayment vehicles associated with interest only loans have become more stringent since this application was made in 2012. When we look at a mortgage application we take a number of different factors into account, which includes assessing each customer’s individual circumstances.”