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mortgage endowment never taken out

This briefing deals with compensation that might be awarded against a lender where:

  • a mortgage was to be paid off by an endowment policy;
  • so the monthly payments to the lender only covered interest;
  • but the endowment policy was never taken out;
  • so now there is nothing 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 a policy was taken out but was not continued.

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 never taken out

if the lender was not at all to blame

Typical cases where we would probably consider the lender was not at all to blame 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 terms of the mortgage did not require the lender to see the policy.
  • The lender provided an endowment mortgage; it was agreed that the borrowers would arrange their own endowment policy; the lender made it clear that it was the borrowers' responsibility to arrange the policy; and the terms of the mortgage did not require the lender to see the policy.

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 is where: the lender agreed that it would arrange the policy; the borrowers had reasonable cause to believe that their monthly payments to the lender included the policy premiums; and the borrowers raised the matter with the lender as soon as the discrepancy became obvious.

If we consider that the lender was 100% to blame, we will require it to pay the current value of a replacement policy's extra premiums - calculated as follows:

Premiums that will have to be paid from now onwards

A

Total premiums that will have to be paid from now for a replacement policy of the same type based on:

  • the original loan
  • the original maturity date
  • the current age and health of the life/lives assured

Premiums that should have been payable from now onwards

B

The total premiums that would have been paid from now if the original policy had been taken out. If the amount of the original premiums is unknown, we will base this on current rates for a replacement policy of the same type based on:

  • the original loan
  • the original term of the policy
  • the original age and health of the life/lives assured

Extra premiums

A - B = C

The difference between the premiums that:

  • will have to be paid from now on the replacement policy [A] and
  • would have been paid from now if the original policy had been taken out [B].

Current value of the extra premiums

D

The borrowers receive compensation now in a lump sum, but the extra premiums will be paid gradually from now to the end of the term. So the current value of extra premiums [D] is the amount that would have to be invested now to make up the extra premiums [C] over the rest of the term. Currently we assume a yearly investment return of 4%.

If the original policy was for the amount of the loan 'plus profits':

  • We are unlikely to deduct the notional past savings that the borrowers made as a result of not having paid premiums. The notional past savings will compensate the borrowers for the reduced time during which profits can be earned.
  • Where appropriate, we will also award compensation for past distress or inconvenience.

In other cases:

  • It is likely that the borrowers will have arranged their expenditure on the basis of their known outgoings. We are only likely to deduct the notional past savings that the borrowers made as a result of not having paid premiums:
    • 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.

If we do deduct any past savings, we will not add interest to them. Usually, we will not award compensation for any future inconvenience of having to pay the original premiums.

example calculations

The following examples are based on a case where:

  • the policy was for an amount which, plus profits, was expected to pay off the loan
  • the premiums that will have to be paid from now onwards [A] are £6,935
  • the premiums that should have been payable from now onwards [B] are £2,826
  • so the extra premiums [A - B = C] are £4,109
  • the current value of the extra premiums [D] is £3,013
  • notional past savings were £2,500
  • we consider that £250-worth of inconvenience was caused to the borrowers.

Ordinarily:

  • we would require the lender to pay compensation of £3,013
  • we would not deduct any of the notional past savings from the compensation
  • 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 £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 compensation
  • we would require the lender to pay net compensation of £2,013 (£3,013 - £1,000)
  • we would not award anything for inconvenience, because the disregarded notional past savings of £1,500 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 £2,500 notional past savings from the compensation
  • we would require the lender to pay net compensation of £513 (£3,013 - £2,500)
  • we would award £250 additional compensation for inconvenience.

if the lender was less than 100% to blame

A typical case where we would probably consider the lender less than 100% to blame is where: the terms of the mortgage required that the lender should see the policy, and it failed to do so; but the borrowers must have known that no policy had been taken out.

In such cases, we would reduce the compensation proportionately. And, once borrowers must have known there was no policy (for example, by discovering that they are not paying premiums) and keep quiet, it would not be fair to disregard any notional past savings that accrue after that.

where the policy was taken out, but was not continued

A separate briefing note deals with cases where a policy was taken out but was not continued.

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.