Our technical advice desk has recently seen a rise in the number of calls about our approach to mortgage underfunding - where a lender has calculated mortgage payments incorrectly.
This is not a new area for us. Each year we deal with a large number of disputes involving situations where this has happened. In these cases, the consumer usually complains that they had been paying the amount quoted by the lender but were then shocked to find that the outstanding mortgage balance was more than they had originally been told.
Our approach to compensation in these cases is not new. Almost ten years ago, in issue 3 of ombudsman news, we set out how we deal with cases involving mortgage underfunding. Our long-standing approach also forms the basis of the information about mortgage underfunding that we have published as part of our online technical resource.
Given the recent interest in how we deal with mortgage underfunding complaints, we have summarised that technical note for this issue of ombudsman news.
Mortgage-underfunding problems can arise where a mortgage lender tells a consumer to make monthly repayments that are too low. This can happen for a number of reasons, most commonly where the lender:
To decide what redress is appropriate, one of the issues we will consider is whether the lender is entirely to blame. This will involve our deciding whether the consumer should have known that they were not paying enough.
This largely depends on what information the consumer was given by the lender. But we also look at the consumer's individual experience and financial knowledge.
We take into account a range of considerations including:
In cases where the monthly repayment was too low because an error by the lender incorrectly extended the term of the mortgage, we will generally decide that the lender is entirely to blame.
Where the term of the mortgage was extended as a result of a misunderstanding between the lender and the consumer, we will decide if the lender is entirely to blame by considering whether:
A typical case where we would be likely to decide that the lender is entirely to blame is where:
In cases like this, our usual approach is to tell the lender to write-off the capital shortfall that has built up, to the date the mistake was sorted out. We will not usually deduct from the shortfall the notional past 'savings' that the borrower made as a result of making
The idea of compensating the consumer in this type of case is to make up for the opportunity they have lost to make the higher repayments. By the time the problem is recognised, the consumer will normally have spent (as part of their normal expenditure) the 'savings' they had been making each month but did not know about.
We will generally assume that the consumer would have made the correct (higher) repayments, if they had been asked to do so.
Exceptionally we might deduct notional past 'savings' (without interest) from the capital shortfall:
Where appropriate, we will also award compensation for past distress and inconvenience - but only so far as it exceeds any notional past 'savings' we have disregarded. We will not usually award compensation for the future inconvenience of having to make increased payments.
Sometimes, unknown to the consumer, the underfunding has lengthened the mortgage term. Occasionally, this is counterbalanced by capital payments made by the consumer (perhaps from an inheritance or a redundancy payment) or by any regular overpayments they made.
The consumer will have made these payments with the intention of shortening the original mortgage term. So we would not generally allow the amount the consumer paid in this way to reduce the normal calculation of compensation. Instead, we would be likely to 'strip out' the effect of the capital repayment or overpayments when calculating loss, by 'modelling' the mortgage account to ignore any extra payments made.
Exceptionally we may modify this approach where we consider it reasonable in the circumstances of the particular case. For example:
There is more information about our approach to compensation for distress and inconvenience in our online technical resource.
Typical cases where the consumer would have to accept part of the blame, and where we would reduce the compensation proportionately, are where:
Once the consumer discovers the problem but keeps quiet, it would not be fair to disregard any notional past 'savings' which subsequently built up.
The following examples are based on a case where:
Usually we would not deduct any of the notional past savings from the capital shortfall.
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:
Exceptionally, if the lender showed that all the past savings formed an identifiable and 'readily-realisable' part of the borrower's current assets:
We would also award £250 for inconvenience.
For printed copies of this or any of our publications, phone 020 7964 0092 or email publications.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.