online technical resource
mortgage underfunding
This section of the website describes how we approach complaints involving disputes about mortgage underfunding.
overview
Repayment mortgages work by the borrower making a repayment each month, covering interest for the month and an amount towards repaying the capital that was borrowed. The longer the term of the mortgage, the smaller the monthly amount that has to be paid towards reducing the outstanding balance.
The situation can arise where the borrower is asked by the lender to make a monthly repayment that is too low. This can happen for a number of reasons, the most common being where the lender:
- Quotes an interest-only payment in error.
- Calculates the repayment from the start over a longer term than the borrower wants – for example, the borrower asks for a 15-year mortgage, but the lender sets it up over 25 years.
- Lengthens the mortgage term in error, or without the borrower’s knowledge (known as "term extension") – for example, the borrower asks for a new loan to be set up over the remaining term of the old loan, but the lender sets it up over a new 25-year term.
- Makes a typing error in the monthly repayment figure quoted to the borrower.
- Forgets to include part of the borrowing when calculating the monthly repayment.
time limits
Generally, a complaint about this can be referred to the ombudsman service up to six years after a lender’s error – or three years after the borrower first became aware (or should reasonably have become aware) of the problem – whichever is the later. (For more details, see "DISP" rule 2.8.2R(2), published as part of the FSA’s Handbook.)
Longer time limits may apply (under the rules of a previous complaints scheme) if the complaint is about events before 1 December 2001 and was referred to us before 1 December 2002.
We may also be able to consider complaints that are referred to us outside the usual time limits in other limited circumstances.
our approach
To decide what redress is appropriate, one of the issues we will consider is whether the lender is entirely to blame. This will involve our deciding whether the borrower should have known that they were not paying enough.
This will largely depend on what information the borrower was given by the lender. But we will also look at the financial knowledge and experience of the borrower.
We will take into account a range of considerations including:
- What the mortgage offer said the monthly repayments would be.
- Whether the mortgage offer tallied with any mortgage illustrations given to the borrower previously.
- Information included in annual statements (for example – whether the balance was shown as going down, what the mortgage term was shown as, and whether the payments were described as "interest-only").
- Information contained in letters about interest-rate changes.
- Whether the borrower queried the payment, but was given a misleading reassurance by the lender.
- The extent to which the borrower should have been reasonably capable of inferring from the overall information given that they were not paying enough.
If the borrower used a mortgage intermediary when arranging the mortgage, we will also consider the duties of that intermediary.
In cases where the monthly repayment was too low, because the lender made an error which incorrectly extended the term of the mortgage, we will generally decide that the lender is entirely to blame.
To assess whether the lender is entirely to blame – in cases where the term of the mortgage was extended as a result of a misunderstanding between the lender and the borrower – we will consider whether:
- The layout and wording of the mortgage application-form helped the borrower to understand what options were available, and made clear what terms were required for the further mortgage advance.
- The borrower told the lender and/or an intermediary clearly what arrangements they wanted in relation to the term of the mortgage.
- Any general policy that the lender had, linking the terms of the original loan and the further advance, was made clear to the borrower at the time they applied for the further advance.
redress if the lender is entirely to blame
A typical case where we would be likely to decide that the lender was entirely to blame is where:
- the mortgage offer itself quoted an incorrect monthly repayment;
- the borrower paid that amount in good faith, believing it to be correct; and
- the borrower raised the matter with the lender as soon as the discrepancy became obvious.
our usual approach
Usually:
- We will tell the lender to write off the capital shortfall that has built up to the date the mistake was sorted out.
- We will not deduct from the shortfall the notional past savings that the borrower made as a result of having made lower payments.
The idea of compensating the borrower in this type of case is to make up for their lost opportunity to pay the higher repayments. By the time the problem is recognised, the borrower will normally have spent the "savings" they made each month, but did not know about, as part of their ordinary expenditure.
We will generally assume that the borrower would have made the correct higher repayments, if they had been asked to do so.
Exceptionally, we will deduct notional past savings (without interest) from the capital shortfall:
- to the extent the lender can show that the past savings are still retained by the borrower as identifiable and "readily-realisable" assets;
- unless the borrower can show that it would be unreasonable to do so in the particular circumstances.
Where appropriate, we will also award compensation for past distress or inconvenience – but only so far as it exceeds any notional past savings we have disregarded. Usually, we will not award compensation for the future inconvenience of having to make increased payments.
Sometimes, unknown to the borrower, the underfunding has lengthened the mortgage term. Occasionally, this is counterbalanced by capital payments the borrower made (perhaps from an inheritance or a redundancy payment) or regular overpayments.
These are made with the intention of shortening the original mortgage term. And so we generally would not allow them to reduce the normal compensation calculation. Instead, we are likely to strip out the effect of the capital repayment or overpayments when calculating loss, by "modelling" the account to ignore any extra payments made.
examples
The following examples are based on a case where:
- The loan was intended to be a £50,000 repayment mortgage over a 25-year term.
- The monthly repayments paid the interest only, because of a mistake by the lender.
- The mistake was discovered after 5 years, with 20 years of the term left.
- At that stage, the mortgage debt was £4,000 higher than it should have been.
- Notional past savings were £3,500.
- We consider that £250-worth of inconvenience was caused to the borrower.
Usually:
We would not deduct any of the notional past savings from the capital shortfall.
- We would require the lender to write off the whole capital shortfall of £4,000.
- We would not award anything for inconvenience, because the disregarded notional past savings of £3,500 exceed the £250 we would otherwise have awarded.
Exceptionally, if the lender showed that £1,000 of the past savings formed an identifiable and "readily-realisable" part of the borrower’s current assets:
- We would deduct £1,000 of the notional past savings from the capital shortfall.
- We would require the lender to write off the remaining £3,000 of the capital shortfall.
- We would not award anything for inconvenience, because the disregarded notional past savings of £2,500 exceed the £250 we would otherwise have awarded.
Exceptionally, if the lender showed that all the past savings formed an identifiable and "readily-realisable" part of the borrower’s current assets:
- We would deduct all of the £3,500 notional past savings from the capital shortfall.
- We would require the lender to write off the remaining £500 of the capital shortfall.
- We would also award £250 for inconvenience.
exceptional cases
Exceptionally, we will modify this approach where we consider it reasonable in the circumstances of the particular case. For example:
- Where the borrower is near or beyond retirement and cannot afford the future payments, even if the whole shortfall to date is written off, we might award some compensation in relation to the future additional payments – or require part of the loan to be interest-free.
- Where the borrower would not have taken out the mortgage at all if they had been told the correct repayment figure, we might compensate them on the basis of putting them in the position they would have been in, if they had not been misled.
- If the borrower ran up arrears by failing to pay all of the incorrect lower repayments – and so showed that they would not have made the correct higher payments anyway – compensation is likely to be reduced accordingly. It is likely that we would reduce compensation to an award for distress and inconvenience only and this is likely to be no more than £250. In reducing compensation, we will consider evidence as to whether the arrears were increasing, static or decreasing – and whether they were for the whole or part of the material time.
We may tell a business to pay for distress and inconvenience caused to the consumer. For more information on our approach, see our technical note on compensation for distress, inconvenience or other non-financial loss.
redress if the lender is not entirely to blame
Typical cases where the borrower would have to accept part of the blame, and where we would reduce the compensation proportionately, are where:
- The mortgage offer itself quoted an incorrect monthly repayment; the borrower initially paid that amount in good faith, believing it to be correct; but the borrower later discovered the discrepancy and kept quiet.
- The mortgage offer itself quoted a correct monthly repayment; but the lender collected the wrong amount by direct debit; and the borrower kept quiet about the discrepancy in circumstances where they must have realised something was amiss.
- The lender provided, and discussed with the borrower, an illustration that quoted the correct monthly repayment; the subsequent mortgage offer quoted an incorrect monthly repayment; and the discrepancy was such that the borrower must have realised that something was amiss.
- The lender mistakenly set up a repayment mortgage as an interest-only mortgage; but we are satisfied that the borrower must have known, from the documents sent to them, that it had been set up as an interest-only mortgage.
Once the borrower discovers the problem and keeps quiet, it would not be fair to disregard any notional past savings which subsequently accrued.
cases involving mortgage intermediaries
The most common complaints about mortgage intermediaries which result in mortgage underfunding are:
- The mortgage application was completed wrongly, either in error or as a result of some misunderstanding about the borrower’s requirements.
- The offer was issued on the incorrect terms, either because the application was wrong or as a result of some error by the lender.
For regulated sales, a mortgage intermediary is required to take reasonable care to ensure the suitability of their advice. In the cases we see, we would usually expect this to mean an offer letter from the intermediary to the consumer, accurately setting out the advice. Our view in the cases we see is that this was also required for sales before the introduction of mortgage regulation.
A mortgage intermediary will not be able to restructure a mortgage account because they are not the lender. This means that redress will be based on the cash payment of all (or a proportion of) the shortfall arising as a result of the error.
This is a recent addition to our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.
