In this brief guide, we are going to cover interest-only mortgage claims.

Interest-only mortgage claims

The Financial Ombudsman Service says it will look into interest-only mortgage claims if it decides it is the lender wrongly advises the borrower to take an interest-only mortgage. For that to happen, the borrower must have been specifically advised to take out an interest-only mortgage over a more suitable financial product

Back in 2013 “The FCA  released research showing there are 2.6 million interest-only residential mortgages which will mature — so need to be paid off — between now and 2041. Of those, 600,000 will mature by 2020.

But alarming findings show 48% will have a shortfall, meaning those borrowers will not be able to afford to repay the entire debt. The FCA estimates the average shortfall to be around £71,000.”

What are interest-only mortgages?

Interest-only mortgages are mortgages where you only have to make interest payments during your monthly mortgage repayment and the capital is repaid in one large lump sum at the end of your mortgage term.

Your interest repayment will remain the same throughout the term of the mortgage as the mortgage balance owed will never go down unless you make an overpayment towards the mortgage balance owed.

Interest-only mortgage were very favourable as they had lower monthly mortgage repayments. This means more people felt they could afford them but not everyone who took on an interest-only mortgage was necessarily qualified to have an interest-only mortgage.

At the end of the interest-only mortgage, you would have to repay the capital and some of the capital repayment methods include:

Using your pension

Using your savings

Selling the property

Selling another property

Remortgaging to a residential mortgage

Getting an equity release

Using your investments

Using a linked endowment policy ( very uncommon)

Is there compensation for interest-only mortgages?

Yes, there may be compensation for interest-only mortgages if they were mis-sold to you by the mortgage lender or your mortgage broker.

You may have an interest-only mortgage claim if you set up your interest-only mortgage with no viable means of repaying it at the end of the mortgage term and the mortgage lender was aware of this.

You may also have an interest-only mortgage claim if your mortgage lender has not reviewed your interest-only mortgage repayment vehicle since you took out your interest-only mortgage.

You may have an interest-only mortgage term if the mortgage lender did not take you through a mortgage affordability assessment to see if you could afford the monthly mortgage repayments on your interest-only mortgage.

You may also have an interest-only mortgage claim if you have tried to switch your interest-only mortgage to a capital repayment mortgage but the mortgage lender would not allow you to do this.

You may also have an interest-only mortgage claim if the mortgage broker who advised you to take on an interest-only mortgage did not look at your finances and check to see if you had a capital repayment vehicle.

You may also have a claim if:

The mortgage lender refused to allow you to extend the mortgage term

The mortgage lender refused to allow you to make payments towards your mortgage balance

The mortgage lender refused to allow you to sell the property to pay off the mortgage balance.

If the risks of an interest-only mortgage were not explained to you when you originally took one out.

You weren’t told that you would need to repay the capital borrowed

If any of the above sounds like you then you should first complain to your mortgage lender, making it clear that you feel like you have an interest-only mortgage claim and why.

If the mortgage lender is unable to help you within 8 weeks of you making your complaint then you can take your complaint to the financial ombudsman.

The financial ombudsman is a free, independent service set up by the government to look into financial complaints about financial services businesses which are regulated and award compensation if necessary.

Once the financial ombudsman has looked at your complaint they may do one or a combination of the below:

“refund the cost of setting up and closing down the mortgage – if we think the consumer had the wrong mortgage 

put the consumer in the position they would’ve been in if they’d received proper advice 

work out a realistic repayment plan with the consumer – if the mortgage was suitable, but the consumer can’t repay the capital 

ask you to pay compensation – if you’ve caused unnecessary distress to the consumer”

What does the financial ombudsman have to say about all of this?

The Financial Ombudsman Service says:

“We’ll look into whether someone was advised to take an interest-only mortgage – or whether they were given information to decide for themselves. If we decide someone didn’t receive advice, we might decide it isn’t fair to say the broker (or lender) is responsible for their choice.

“If someone received advice about their mortgage, we’ll decide whether an interest-free mortgage was a suitable option at the time – rather than in their circumstances now.

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“If someone’s told their lender they can’t afford to pay off their mortgage, we’ll check the lender has responded sympathetically and constructively – even if they didn’t give advice about the mortgage. There’s more information about this in our approach to financial difficulties.

“If we decide someone was wrongly advised to take out an interest-only mortgage – and they’ve lost out as a result – we’ll try to put them in the position they’d be in if they’d had a more suitable mortgage. That might mean telling the business responsible to refund some of the costs of the mortgage.”

In this brief guide we discussed interest-only mortgage claims. If you have any questions or comments please let us know.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.