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Debt Advice Handbook 14th edition

Mortgage

• The legal position
• Special features
• Checklist for action

Usually, the term ’mortgage’ is used to describe a loan to buy a house or flat. If repayments are not maintained, the lender can recover the money lent by repossessing the property and selling it. A ’charge’ is registered on the property to safeguard the rights of the lender.

**Alert: The FCA aims to ensure that clients affected by coronavirus continue to be offered the support they need and that this support is tailored to the client: called ‘tailored support’ by the FCA. That could potentially involve extended payment deferrals that will need to be reported on the client’s credit reference file. The FCA’s additional tailored support guidance can be viewed at: fca.org.uk/publication/finalised-guidance/mortgages-and-coronavirus-tailored-support-guidance.pdf. This guidance applies with effect from 1 April 2021 and remains in force until varied or revoked. It applies in addition to the provisions of the FCA’s Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB), in particular MCOB 13: see here). The FCA expects lenders to be flexible and not to take a ‘one size fits all’ approach but to consider the use of a range of short- and long-term options, including, in particular:

•Providing appropriate forbearance that is in the clients’ interests after consideration of their individual circumstances. Lenders should not repeatedly pursue the same forbearance option without re-considering whether it remains appropriate or whether an alternative option should be explored.
•Supporting clients through a period of payment difficulties and uncertainty, including by considering their other debts and essential living costs.
•Ensuring they recognise and respond to the particular needs of vulnerable clients, especially those with ‘protected characteristics’ under the Equality Act 2010, such as physical or mental health disabilities.
•Having systems, processes and adequately trained staff in place with any staff incentives aligned with providing clients with the help they need.
•Reviewing any client’s arrangements regularly and, where a client’s circumstances have changed, re-considering what support they need.

Lenders are also expected to offer clients any support they may need in managing their finances, such as signposting clients to money guidance or referring them for debt advice in appropriate cases.

Unless a client is unreasonably refusing to engage with a lender, the lenders should not repossess a client’s property solely on the ground that any deferred payments remain unpaid. The lender’s arrears and repossessions policy should specifically address this situation.**

The legal position

First mortgages from building societies and the major banks are exempt from regulation by the Consumer Credit Act 1974 (see here).

Since 31 October 2004, most mortgage lending (including arranging and administering mortgages) has been regulated by the FCA (previously the Financial Services Authority).

Firms involved in mortgage-related activities must be authorised by the FCA. If they are not, they commit a criminal offence and any regulated mortgage contract cannot be enforced, unless the court is satisfied that it is ’just and equitable’ to do so. To check whether a lender or intermediary is authorised, see fca.org.uk/firms/financial-services-register.

A mortgage is a regulated mortgage contract if it was taken out on or after 31 October 2004 and:

•the borrower is an individual – ie, s/he is acting as a consumer and not for business purposes;
•the loan is secured by a first mortgage on a property;
•the property is at least 40 per cent occupied by the borrower or her/his family as her/his residence.

Since 21 March 2016, secured loans which are not first mortgages are also regulated mortgage contracts if they meet the rest of the above critera and:

•the loan was made before 21 March 2016 and was a regulated credit agreement when it was made and so covered by the Consumer Credit Act 1974; or
•the loan was made after 21 March 2016, but would have been a regulated agreement and covered by the Consumer Credit Act 1974 if it had been made before this date.

Special features

There are a variety of different mortgages.

•Capital repayment mortgage. The amount borrowed (‘capital’) is repaid gradually over the term of the mortgage. At the beginning, repayments comprise virtually all interest, but towards the end of the term of the mortgage they are virtually all capital.
•Endowment mortgage. Repayments cover the interest on the capital borrowed and separate payments are made to an insurance company for the endowment premium. The capital is repaid at the end of the term of the mortgage in one lump sum from the proceeds of the insurance policy. Endowment policies aim to pay off the mortgage capital when they mature and produce extra capital for the borrower to use as s/he wishes. However, there is no guarantee that the policy will pay off even the capital, let alone provide extra money. Any client with an endowment mortgage should contact the policy provider and enquire how much the policy is expected to produce on maturity, and get independent financial advice if a shortfall is predicted.
•Pension mortgage. The borrower pays interest only to the lender and a separate pension premium which attracts tax relief. When it matures, the cash available from this pension pays off the capital on the mortgage and the rest funds a personal pension plan.
•Low-start/deferred-interest mortgage. Reduced interest is charged for the first two to three years. In some schemes, interest accrues during the first few years, but payment is spread over the remaining term of the mortgage. They are only helpful for people who expect their income to increase so that they can afford the rise in repayments after the first few years. These are sometimes known as ’discount-rate mortgages’.
•Interest-only mortgage. Under this type of mortgage, the client only pays interest on the loan during the term of the mortgage. This means that s/he pays lower monthly repayments to the lender during the term of the mortgage, but nothing towards the capital sum originally borrowed. So unless the client has a vehicle to repay the capital at the end of the mortgage term, such as an insurance policy, or has access to a lump sum, s/he may have to sell the property in order to repay the orginal loan. If your client is in this situation, refer to the FCA consultation on interest-only mortgages (May 2013) at fca.org.uk/publication/guidance-consultation/gc13-02.pdf.1See also C Howell, ‘Interest-only Mortgages Coming to the End of Their Term’, Quarterly Account 37, IMA
•Fixed-rate mortgage. The interest rate is fixed for a number of years, either at the outset or during the life of the loan. They are obviously more attractive during a period when interest rates are rising.
•Tracker mortgage. These mortgages guarantee to follow the Bank of England’s base rate or some other rate up or down, maintaining the same differential between the rate charged and that set by the Bank of England.
•Other types of mortgage. These include ‘capped rates’, where repayments do not exceed a set level (the ’cap’), or ’collared rates’, where payments do not fall below a set level (the ‘collar’).

See below for mortgage shortfalls after a property is repossessed.

 

Regulated mortage contracts

Generally, lenders and intermediaries must conduct their business with integrity, consider the interests of clients and treat them fairly. The detailed rules are set out in the FCA’s Mortgages and Home Finance: Conduct of Business Sourcebook,

available at handbook.fca.org.uk/handbook/MCOB.pdf.

Following a review of the mortgage market by the FCA,2See L Woodall, ‘Mortgage Market Review’, Quarterly Account 33, IMA the following has applied since 26 April 2014.3FCA Handbook, MCOB 11.6

•Lenders are fully responsible for assessing whether a client can afford the loan and must verify the client’s income. Although lenders can use intermediaries in this process, the lender remains responsible.
•Lenders can grant interest-only mortgages, but must have evidence that the client has a credible repayment strategy.
•When taking account of the client’s income and/or assets for the purpose of an affordability assessment, lenders must obtain independent evidence and must verify the client’s income and not rely on a client’s (or her/his representative’s) own general declaration of affordability or the client’s self-certification of income.

Lenders must deal fairly with clients in arrears, and have a written arrears policy in place and follow it. This requires the lender to use reasonable efforts to reach an agreement with the client over repayment, liaise with advisers and apply for repossession only when all other reasonable attempts to resolve the situation have failed. Within 15 business days of the account falling into arrears (defined as the equivalent of two monthly payments), the lender must send the client a copy of the FCA’s information sheet on mortgage arrears, together with a statement of account, including details of the arrears, charges incurred and the outstanding balance. This information must be provided at least quarterly and, even if a repayment arrangement is in place, the information must still be sent out quarterly if the account is attracting charges.

From 30 June 2010, lenders must not charge arrears fees if the client is complying with an arrangement to pay those arrears.4See complaint to Financial Ombudsman Service (Adviser 154 abstracts) Lenders must not put pressure on clients through excessive telephone calls or letters and must not contact them at unreasonable hours (’reasonable hours’ are defined as 8am–9pm). Lenders must not use documents that look like court forms or other official documents containing unfair, unclear or misleading information designed to coerce the client into paying.

If a lender does not comply with the above rules, the client could make a complaint, or complain to the Financial Ombudsman Service if the matter cannot be resolved with the lender or intermediary.5See P Bristow, ‘One-stop Complaints Shop’, Adviser 107, and S Quigley, ‘Removing the Barriers’, Adviser 109

If a property is repossessed, the lender must market it as soon as possible and obtain the best price that might reasonably be paid, although the lender is entitled to take account of market conditions or other factors that might justify deferring a sale.

In October 2011, the Council of Mortgage Lenders (which has been part of UK Finance since 2017) issued industry guidance on arrears and possessions to assist lenders to comply with Part 13 of the Mortgages and Home Finance: Conduct of Business Sourcebook and their duty to treat customers fairly. It can be found at

As well as guidance, this document contains examples of good practice and is an essential reference for advisers (see here).

The FCA has introduced new rules to help clients who are up-to-date with their mortgages, but who have been unable to switch to cheaper loan deals because of changes to lending practices during and after the 2008 financial crisis and the subsequent tightening of lending standards.6FCA Handbook, MCOB 11.9 which came into effect on 28 October 2019 This group of borrowers are often referred to as ‘mortgage prisoners’.

 

Mortgage prisoners

The new rules allow mortgage lenders to provide ‘more affordable mortgages’ where:

•the new mortgage has a total lower expected cost and lower interest rate over the deal period (or whole term if there is no deal period) than the current mortgage; and
•the typical monthly payment over the new mortgage (during the deal period or if there is no deal period over the whole mortgage term) is lower than the monthly payment made in every one of the last 12 months under the current mortgage.

The new rules apply where the client:

•has a current mortgage;
•is up to date with her/his mortgage payments;
•does not want to borrow more, other than to finance any relevant intermediary, product or arrangement fee for the mortgage; and
•is looking to switch to a new mortgage deal on her/his current property.

The new rules also apply to interest-only mortgages. The lender can extend a mortgage term but must warn the client if this would extend borrowing into retirement.

The modified ‘affordability assessment’ cannot be used when the client is looking to switch to a new mortgage on a new property. The new mortgage deal does not have to be with the same lender. While the new rules may help a considerable number of clients to obtain cheaper remortgages, they will be of no assistance to those with arrears and are unlikely to help those in negative equity.

 

1     See also C Howell, ‘Interest-only Mortgages Coming to the End of Their Term’, Quarterly Account 37, IMA »

2     See L Woodall, ‘Mortgage Market Review’, Quarterly Account 33, IMA »

3     FCA Handbook, MCOB 11.6 »

4     See complaint to Financial Ombudsman Service (Adviser 154 abstracts) »

5     See P Bristow, ‘One-stop Complaints Shop’, Adviser 107, and S Quigley, ‘Removing the Barriers’, Adviser 109 »

6     FCA Handbook, MCOB 11.9 which came into effect on 28 October 2019 »

Checklist for action

Advisers should take the following action.

•Consider whether emergency action is necessary (see Chapter 8).
•Check liability. If possession proceedings have started, see Chapter 12.
•Assist the client to choose a strategy from Chapter 8 as this is a priority debt if the debt is secured on the client’s current home. Otherwise, the arrears are a non-priority debt. Assist the client to choose a strategy from Chapter 9.