Will interest only mortgages be the next big mis-selling scandal?
The PPI mis-selling scandal was one of the biggest things to rock the banking world in recent years, with many financial institutions being hit with hefty fines and millions of consumers rightly being compensated.
If you believe you were mis-sold a policy there is still plenty of time to get a claim going, and you can do it yourself without using agencies who take a large percentage. However, it seems that payment protection isn’t the only thing many borrowers have been sold unwittingly.
Prior to it being replaced by the Financial Conduct Authority (FCA), the Financial Services Authority (FSA) warned that interest only mortgages are a “ticking time bomb” for millions of homeowners, and it’s easy to see why.
Historically, interest only mortgages were only suitable for people who could guarantee yields from an investment in the future. In the 1980s, we saw the trend of people taking endowments out to cover interest-only borrowings, but for thousands these did not perform and a huge mis-selling scandal ensued.
But a trend seen in the years leading up to the economic downturn of 2007/2008 has the potential to cause even bigger problems. While endowments did not work for many, most provided some return. However, large house price rises in the early to mid-2000s saw many people take mortgages out with no repayment vehicle at all.
Interest-only is exactly as it sounds. People borrow money to fund a house purchase and only pay the interest each month. At the end of their repayment period, they still owe the amount they borrowed. When house prices rose, many families opted for interest only in order for them to still be able to fund their dream move. For some, it was a temporary measure, with them changing to full capital and interest after they’d settled in their new home, while others were sold ISA investment plans alongside their borrowing, and some unfortunately never made any repayment provisions.
Because of poor stock market returns and what can only be described as negligence, those in the second and third groups could well face major financial problems in the future. Shockingly, some people do not even know their mortgage is on an interest only basis, despite their monthly payments being smaller than normal.
Responsible lenders always ask for evidence of a repayment vehicle and new regulations mean the chances of obtaining an interest only mortgage without one is now virtually impossible, but that wasn’t necessarily the case a decade or so ago and the likelihood of a another mis-selling scandal is high.
If you feel you have been mis-sold your mortgage, you can take action with your lender now. Consumer champion Which? has a template letter that can be used if need –http://www.which.co.uk/consumer-rights/action/letter-to-complain-about-a-mis-sold-mortgage.