Interest-only mortgages

Consumers may come to us in the middle or towards the end of their mortgage term – or sometimes even after their house has been repossessed.

People complain that:

• they were advised to take an interest-only mortgage and now can’t afford to repay the capital 
• their lender won’t help because it was the broker’s responsibility to advise them
• they want to switch to a capital repayment plan – but the lender won’t let them
• their mortgage term is ending and the lender won’t let them extend it
• their mortgage term is ending and they can’t sell their property and are being threatened with repossession
• they don’t want to apply for a term extension

You have the opportunity to sort things out before we get involved. If a customer complains and you don’t respond within the relevant time limits, or they disagree with your response, then they can come to us.

Find out more about how to resolve a complaint.

Things to consider

Making sure the customer had a plan in place to pay off the capital

If a consumer gets advice through a broker, we’ll usually put more responsibility on the broker for making sure the mortgage was suitable.

Following the FCA’s Mortgage Market Review, in 2014 rules were brought in that say it’s the lender – not just the broker – who’s responsible for checking the borrower’s got a plan for repaying mortgage capital. If you’re a lender, you should make sure you:

• communicate with the consumer every few years and ask how they intend to repay the capital
• encourage your customer to get in touch if there are any problems

Sometimes problems arise because the consumer’s circumstances changed after they took out the mortgage. If the mortgage was suitable at the time and the customer had a realistic plan to repay the balance, it's unlikely we’ll conclude anything was wrong at the point of sale. But you’ll still need to treat your customer fairly.

Fair treatment of customers at risk of being unable to repay

You need to show you’ve explored all options in a fair manner – taking possession should be a last resort. Your actions should have included:

• considering reasonable requests made by the consumer – for example, a term extension, conversion to a repayment mortgage, or allowing overpayments
• considering whether the consumer has other options to repay the debt, such as a new mortgage with another lender or equity release
• ensuring your customer knows they can get advice on their options, by referring them to a free independent debt organisation, or suggesting they speak with an independent financial adviser

The FCA also has guidance on how to treat interest-only mortgage customers who can’t pay, which you may find useful.

If a consumer tells you that they can’t afford to pay off the capital, we’ll check you responded fairly. You should do this, even if you didn’t give advice about the mortgage.

We’ll look at whether you:

• listened to the consumer and paid attention to their circumstances
• considered proposals that were realistic and in your customer’s best interests
• offered to help – perhaps by changing the mortgage to a repayment loan or allowing the consumer more time to pay – and if you weren’t able to do so, that you’ve explained why

When someone complains about a mis-sale, we’ll ask the consumer what they remember. We’ll look at the rules in place when the mortgage was taken out – and work out whether it was suitable, and whether the consumer was given advice.

If a consumer thinks they got advice – but the paperwork suggests they didn’t – we’ll decide whether it was clear that the business was making a recommendation.

If a consumer did get advice about their mortgage, we’ll decide whether an interest-free mortgage was a suitable option at the time.

If we decide a broker or lender did something wrong, we’ll look at the consumer’s circumstances when working out compensation. We’ll think about what they might have done differently if the mistake hadn’t happened. They may:

• have taken out a different mortgage, or put a repayment plan in place
• not have taken out a mortgage out at all

To put things right we may ask you to:

• 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 

Search our decisions database to find out about past decisions on complaints involving mortgage shortfall.

The FCA has guidance on dealing fairly with interest-only mortgage customers and a thematic review (TR18/1)  examining fair treatment.