Mortgages are one of the most important and complete financial products that we will take out in our lifetime. They can be quite complex, and choosing a mortgage that is most suitable for you can seem daunting.
In a lot of instances, people will decide to seek assistance from a mortgage broker, independent financial advisor, or alternatively, the lending institution from which they plan to obtain a mortgage from.
However, when seeking advice from the lender directly, the advice given may not always be in the best interests of the customer, which can lead to customers finding themselves in inappropriate, unsuitable and very costly mortgage products.
There are two main types of mortgages that were typically mis-sold to customers, an interest-only mortgage and an endowment mortgage.
What is an interest only Mortgage?
An interest only mortgage, while giving cheaper monthly payments, does not pay off any of the loan amount. With these types of mortgages, your payments only cover the interest on the loan amount.
At the end of the mortgage term, the amount borrowed will still be owed to the lender, for which you plan will need to have been made for repayment.
Many people found they were relying on house prices rising to repay the amount borrowed. However, a major risk with relying on house prices is that they may fall. This would mean that should you sell the property to pay the outstanding loan amount, it may not be sold for enough money to cover the whole of the loan.
There has been new regulatory requirements brought in under the Financial Conduct Authority’s Mortgage Market Review which requires lenders to only provide interest only mortgages in the event that there is a credible repayment strategy for the capital.
Since the financial crisis in 2008, interest only mortgages have fallen out of favour with the Banks, and some will only offer them in exceptional circumstances.
How were interest only Mortgages mis-sold?
When taking out an interest only mortgage, the broker or the lender should have made you aware as to how you would repay your mortgage when it ended. The options for how to repay the loan amount should have been discussed with you to make you aware of your obligations at the end of mortgage term.
They should also have taken you through other mortgage options available to you such as the more popular and often most suitable repayment mortgage. The costs of the different types of mortgage available to you should have been compared in order for you to make the best decision for your circumstances.
The lender or the broker should also have explained that you may have to switch from an interest only mortgage to a repayment mortgage, rather than relying on rising house prices.
The lender should also take into account your financial suitability for an interest only mortgage. If they advised you to re-mortgage your property as a way of consolidating your debts, this could count as mis-selling.
The large majority of brokers charge for their services, however, if you paid unreasonably high fees this could also constitute mis-selling.
What is an endowment Mortgage?
An endowment mortgage is not technically a type of mortgage. Endowment policies were actually sold alongside interest only mortgages as a way of being able to save to pay off the capital owed to the Lender. It is essentially an investment product, which invests in shares, bonds and property.
Each month, alongside your interest-only mortgage, you would pay a premium for the endowment policy. The idea is that the endowment grows to produce a lump sum large enough to repay the loan in full at the end of the mortgage term. Within the package, life insurance was also included which meant your loan would be repaid if you died.
Unfortunately, there was no guarantee that the endowment would pay off the whole of the mortgage amount.
Millions of people are now facing having their policy pay out less than the target amount, meaning they may not be able to pay off the whole of their loan amount.
Following the Financial Crisis in 2008, endowment policies have also fallen out of favour with Lenders, along with interest only mortgages.
How were endowments mis-sold?
When taking out an endowment policy, the broker or the lender should have checked your financial suitability for the products. Were you provided with detailed, comprehensive information before you took of the endowment?
Many people were led to believe that the endowment would definitely pay off the mortgage (and potentially leave them with an extra bit of money). People were not informed that the return you would receive is dependent upon the performance of the policy. Following this, people were told that there could be a shortfall at the end of the mortgage term.
As an endowment is a form of investment, many people were unaware of how the endowment would be invested, or the risks associated with it.
Some people were advised to cash in existing endowments, to then be sold another to replace it. This is known as churning and is against the Financial Conduct Authority’s rules.
How can we help?
If you have been sold an interest only mortgage and/or endowment policy, believing the endowment policy would cover the whole of the loan amount, and now find yourself unable to repay the loan amount, it is possible that there has been a mis-sell.
The team here at Cooper Stern are experts in helping you seek the redress you deserve if you have been given poor investment advice by your Bank, Building Society or financial advisor. If an investment involves potential risk to your capital then you may be entitled to make a claim. We are able to offer advice on the mis-selling of a variety of investments.
We are uniquely placed to be able to offer a claims management solution to those who fear they may have been mis-sold a complex financial product linked to mortgages. We are able to analyse their financial suitability, advise on the grounds for a claim and seek satisfactory redress if needed.