This section of the website describes how we approach complaints involving disputes about mortgage underfunding
A consumer with a repayment mortgage makes 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 the consumer has to pay towards reducing the outstanding balance.
We do see cases where a lender has asked a consumer to make a monthly repayment that is too low. This can happen for a number of reasons, but usually the lender:
- has quoted an interest-only payment in error.
- has calculated the repayment from the start over a longer term than the consumer wanted - for example, the consumer asks for a 15-year mortgage, but the lender sets it up over 25 years.
- has lengthened the mortgage term in error, or without the consumer's knowledge (known as "term extension") - see below for more information.
- has made a typing error in the monthly repayment figure quoted to the consumer.
- has forgotten to include part of the borrowing when calculating the monthly repayment.
The result is that the consumer has paid too little each month, and either the balance on the mortgage has not reduced at all (if the payment only covered interest) or the mortgage balance has not reduced at the right rate. Either way, the consumer finds that they owe more than they should on their mortgage account.
When a consumer borrows more money on their existing mortgage, “term extensions” can happen.
In some cases, a lender will automatically extend the original loan to match the term of the new additional borrowing. This is often because of limitations in the lender’s mortgage system, which may, for instance, be unable to run two terms at the same time.
Additionally, in the past some lenders have offered mortgages with an estimated rather than a fixed term. But this does not mean that a lender can avoid its duty to make clear to the consumer what options are available for the term of their loan when they take a further advance.
Extensions can also happen when there is a misunderstanding between the lender and the consumer about exactly what term is intended. For example, the consumer may ask 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.
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our approach to cases involving underfunding
When we deal with a case involving underfunding, we need to establish whether the lender is at fault - either completely or partially - and whether the consumer should have known that they were not paying enough.
We take into account what information the lender has given the consumer, as well as the consumer's financial knowledge and experience. We also take into account:
- what the mortgage offer said the monthly repayments would be;
- whether the mortgage offer tallied with any mortgage illustrations that had been given to the consumer 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 consumer queried the payment and was given misleading reassurance by the lender;
- the extent to which the consumer should have been reasonably able to work out they were not paying enough from the information they received.
If the consumer used a mortgage intermediary when they arranged 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.
In cases where the term of the mortgage was extended because of a misunderstanding between the lender and the consumer, to assess whether the lender is entirely to blame we will consider whether:
- the layout and wording of the mortgage application documentation helped the consumer to understand what options were available, and made clear what terms were required for the further mortgage advance;
- the consumer told the lender and/or an intermediary clearly what they wanted in relation to the term of the mortgage;
- the lender made clear to the consumer any policy it had in place to link the terms of the original loan with the further advance - at the time the consumer took out the advance.
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redress if the lender is entirely to blame
A typical case where we would be likely to decide that the lender is entirely to blame is where:
- the mortgage offer itself quoted an incorrect monthly repayment;
- the consumer paid that amount in good faith, believing it to be correct; and
- the consumer raised the matter with the lender as soon as the discrepancy became obvious.
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our usual approach
In cases where the lender is entirely to blame, we tell the lender to put the consumer in the position they would have been in had the mistake not happened. In these cases, this involves making up for the consumer's lost opportunity to make the higher repayments. We will usually tell the lender to write off the capital shortfall that had built up to the date the mistake was sorted out.
By the time the problem comes to light, the consumer will normally have spent the "savings" they made each month - but did not know about - as part of their ordinary expenditure. So we will usually not deduct from the shortfall the notional past savings that the consumer made as a result of having made lower payments.
We will generally assume that the consumer would have made the correct higher repayments if they had been asked to do so.
In exceptional circumstances, we will deduct notional past savings (without interest) from the capital shortfall to the extent the lender can show that these savings are retained by the consumer as identifiable and "readily-realisable" assets. We will not do this if the consumer 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 the underfunding has lengthened the mortgage term. Occasionally, this underfunding is counterbalanced by capital payments that the consumer has made (perhaps by lump sum or regular overpayments).
The consumer has made these overpayments with the intention of shortening the original mortgage term. 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.
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 consumer.
- 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 consumer'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 consumer'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.
We would modify this approach if we considered it reasonable in the circumstances of the particular case. For example:
- If there has been a change in the consumer's circumstances (for example, if the consumer is near or beyond retirement or has become unable to work) and they 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 consumer would not have taken out the mortgage at all if they had been given the correct repayment figure, we might tell the lender to put them in the position they would have been in, if they had not been misled.
- If the consumer fell into arrears by failing to pay all of the incorrect lower repayments - and so showed that they would not (or could not) have made the correct higher payments anyway - compensation is likely to be reduced accordingly. Where the consumer was in arrears we will look into the circumstances of the arrears - whether they were for the whole or part of the relevant time and whether they were increasing, remained the same or were decreasing. We will also decide whether the arrears can be attributed to any error by the lender in the administration of the account - from the term extension or otherwise. See below for more information.
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 distress, inconvenience or other non-financial loss.
where the consumer fell into arrears
- where the consumer was in arrears for the whole of the material time
If the arrears remained the same or were increasing for the whole of the time during which the underfunding occurred, it is often reasonable to suppose that the consumer was already paying all they could. This means they could not have paid the higher repayment, even if the lender had asked them to. We might decide in such cases that the consumer has actually suffered no loss through being asked to pay the wrong amount. But we may award some compensation for distress and inconvenience.
Where arrears were reducing steadily, this could indicate that the consumer had budgeted to cover the monthly repayment and a set amount towards the arrears, so it is possible that if they had been told the correct monthly repayment, they might have been able to meet that too. This is more likely to be so where there is a relatively small difference between what the consumer was asked to pay each month, and what they should have paid. In these cases, we might decide not to reduce the amount of compensation.
- where the consumer was in arrears for part of the time in question
Arrears may have been caused by a specific event such as unemployment, accident or maternity leave and the consumer may have acted responsibly and started a methodical reduction of the arrears as soon as reasonably possible. In these circumstances we might decide not to use the period of arrears as a reason to reduce compensation for loss. Again, this is more likely to be so where the difference between the monthly repayment the consumer should have paid, and what they actually paid, was relatively small.
Alternatively, the account may show a long history of recurrent arrears, perhaps because of an underlying problem such as chronic illness. In that case, we might decide to assess loss by assuming that the consumer could have maintained the higher repayment during the periods in which the account was not in arrears, but could not have done so during the periods in which there were arrears.
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redress if the lender is not entirely to blame
When we are likely to decide that the consumer was partly to blame - and where we would reduce the compensation proportionately - might include cases where:
- The mortgage offer itself quoted an incorrect monthly repayment. The consumer initially paid that amount in good faith - believing it to be correct - but later discovered the discrepancy and kept quiet.
- The mortgage offer itself quoted the correct monthly repayment,,but the lender collected the wrong amount by direct debit - and the consumer kept quiet about the discrepancy in circumstances where they could reasonably have realised that something was amiss.
- The lender provided, and discussed with the consumer, an illustration that quoted the correct monthly repayment. The subsequent mortgage offer stated an incorrect monthly repayment; and the discrepancy was such that the consumer could reasonably 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 consumer must have known, from the documents sent to them, that it had been set up as an interest-only mortgage. In such cases, we will usually decide that it would be unfair to disregard the consumer's past savings after the point that they knew, or should have known, about the problem but kept quiet.
assessing loss and compensation
We will base the assessment of loss on the difference between the actual outstanding balance on the mortgage account, and what it would have been had the correct monthly repayment been made. But we will adjust this figure in line with the principles set out in this note.
Normally, the lender will have produced (or will be able to produce) figures to show what the position on the account would have been had the underfunding not happened.
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cases involving mortgage intermediaries
The most common complaints we see about mortgage intermediaries that result in mortgage underfunding are where:
- the mortgage application was completed wrongly, either in error or as a result of a misunderstanding about the consumer's requirements;
- the mortgage offer was issued on the incorrect terms, either because the application was wrong or as a result of an error by the lender.
A mortgage intermediary is required to take reasonable care to ensure that their advice is suitable. 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.
Of course, this does not mean that the consumer has no responsibility to check the terms of a mortgage offer. But we are mindful that the mortgage intermediary is the expert - and therefore more likely to be able to identify any discrepancy.
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.
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This is part of 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.