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mortgage endowment not continued

This briefing deals with compensation in cases where:

  • an endowment policy was taken out to pay off the mortgage;
  • so the monthly payments to the lender only covered interest;
  • but the endowment policy was not continued;
  • so there is no longer anything to pay off the mortgage with.

This clarifies our general approach to such cases. It may help lenders that wish to settle with people who have complained to them. A separate briefing note deals with cases where no policy was ever taken out.

We are required to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case. We may decide that fairness requires a different approach in a particular case.

We apply the law, the principles of the Mortgage Code and good industry practice. We don't write the Mortgage Code and we have no power to make rules about how financial services are provided.

where the policy was taken out, but was not continued

The policy may have stopped from a variety of causes, including:

  • the insurance company stopped collecting the premiums
  • unknown to the borrowers, a direct debit or standing order for the premiums failed
  • the borrowers deliberately stopped paying the premiums
  • the borrowers surrendered the policy

We will consider whether the lender:

  • knew, or should have known, the policy was not continued
  • made the consequences clear to the borrowers
  • is to blame for not having converted the mortgage to a repayment mortgage

if the lender was not at all to blame

Typical cases where we would probably consider the lender was not at all to blame for not converting the mortgage are where:

  • The lender made it clear at the outset that: the mortgage was interest-only; it was the borrowers' responsibility to ensure that they took out a policy or had some other way of paying off the mortgage; and the lender did not require to see the policy.
  • The lender made it clear, when it discovered that the policy had stopped, that: the mortgage was interest-only; and it was the borrowers' responsibility to ensure that they took out a new policy or had some other way of paying off the mortgage.
  • The borrowers could not afford to continue the policy premiums; the lender and borrowers agreed that the mortgage should be interest-only; and the lender made it clear that it was the borrowers' responsibility to ensure they took out a new policy, or arranged some other way of paying off the mortgage, once their financial position improved.
  • It was not apparent to the lender that the policy had stopped.

In such cases, we would not award any compensation.

if the lender was 100% to blame

A typical case where we would probably consider the lender was 100% to blame for not converting the mortgage is where: the lender required a policy to be taken out; it was not apparent to the borrowers that the premiums had stopped; but it was apparent to the lender that the policy had stopped.

Usually:

  • we will tell the lender to write off the capital which would have been paid off (if the mortgage had been converted to repayment) since the date the lender should have known that the policy had stopped.
  • if it was not apparent to the borrowers that the premiums had stopped, we will not deduct the notional past savings that the borrowers made as a result of not having paid the premiums.

Exceptionally, even if it was not apparent to the borrowers that the premiums had stopped, we will deduct the notional past savings (without interest):

  • to the extent the lender can show that the past savings are still retained by the borrowers as identifiable and readily-realisable assets;
  • unless the borrowers 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.

example calculations

The following examples are based on a case where:

  • the loan was an interest-only mortgage
  • the capital was to be repaid by an endowment policy
  • the endowment policy was taken out, but the lender discovered it had later lapsed
  • the lender failed to convert the mortgage to repayment
  • if the mortgage had been converted, £4,000 would have been paid off the capital
  • notional past savings were £3,500
  • we consider that £250-worth of inconvenience was caused to the borrowers.

Ordinarily:

  • we would require the lender to write £4,000 off the capital
  • we would not deduct any of the notional past savings from the capital written off
  • 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 borrowers' current assets:

  • we would deduct £1,000 of the notional past savings from the capital written off
  • we would require the lender to write off the remaining £3,000 from the capital
  • 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 borrowers' current assets:

  • we would deduct all of the £3,500 notional past savings from the capital written off
  • we would require the lender to write off the remaining £500 from the capital
  • we would also award £250 for inconvenience.

exceptional cases

Exceptionally, we will modify the approach where we consider it reasonable in the circumstances of the particular case. For example:

  • Where the borrowers are near or beyond retirement and cannot afford the future payments, even if the shortfall from the date the policy stopped is written off, they might find it easier to show that it would be unreasonable for retained past savings to be deducted.
  • If the borrowers ran up arrears by failing to pay all of the interest-only payments, this may demonstrate that they would not have paid the premiums (if they had realised they were not being paid) or full repayments (if the mortgage had been converted to a repayment basis). In such cases, compensation is likely to be reduced accordingly.

if the lender was less than 100% to blame

Typical cases where we would probably consider the lender was less than 100% to blame for not converting the mortgage are where:

  • the lender required a policy to be taken out; it was apparent to the lender that the policy had stopped and it did not contact the borrowers; but it was apparent to the borrowers (then or later) that the premiums had stopped.
  • the lender required a policy to be taken out; it was apparent to the lender that the policy had stopped and it did not contact the borrowers; but the borrowers had deliberately stopped paying the premiums or surrendered the policy.

In such cases, we would reduce the compensation proportionately. If the borrowers knowingly stopped paying the premiums or surrendered the policy, we would expect them to bear almost all the loss.

Once the borrowers do discover they are not paying premiums (or knowingly stop paying the premiums or surrender the policy) and keep quiet, it would not be fair to disregard any notional past savings which accrue after that.

where the policy was never taken out

A separate briefing note deals with cases where no policy was taken out.

please note ...

We will not reopen past cases where a full and final settlement was agreed between lender and borrower. Nor will we reopen past cases that were the subject of an initial decision (accepted by both parties) or a final decision by the Financial Ombudsman Service, Banking Ombudsman Scheme or Building Societies Ombudsman Scheme.