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zugzwang

'Mortgage prisoners' offered new hope for compensation

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Financial Ombudsman orders HBoS to get with the debt relief.

http://www.telegraph.co.uk/personal-banking/mortgages/mortgage-prisoners-new-hope-compensation-payments-overpriced/

Quote

Britain’s biggest lender has suffered a damaging defeat in a landmark ruling that could open the floodgates to complaints from thousands of “mortgage prisoners”.

The Financial Ombudsman Service has delivered a final verdict on a complaint from a mortgage customer against Lloyds Banking Group – which owns Halifax and Bank of Scotland.

The customer, who asked not to be named, had been stranded on Bank of Scotland’s standard variable rate (SVR) for over four years. He paid thousands of pounds a year in extra payments because the bank refused his requests to move to a cheaper, fixed-rate deal, and fell into arrears at some points.

While fixed mortgage rates have fallen in line with the Bank of England base rate, lenders’ SVRs have remained flat or increased (see chart, below).

Thousands of people who took out mortgages before the financial crisis found they were barred from switching to new fixed-rate mortgages when existing deals ended.

Lenders said rules introduced following the crisis, known as the Mortgage Market Review, meant existing customers now failed stricter “affordability” tests. This led to the bizarre situation where customers, known as mortgage prisoners, were told they couldn’t afford to switch to cheaper rates.

In January, Telegraph Money reported that Bank of Scotland had been ordered by the Ombudsman to allow the customer to pick a new fixed-rate deal and come off the SVR, which had been as high as 3.99pc. The payments on the interest-only mortgage, first taken out in 2008, were £1,300 a month at this rate.

Moving to a fixed-rate deal in May 2015, when he made an attempt to switch, would have halved his payments. But Bank of Scotland rejected the application because of what it considered an inappropriate plan to repay the interest-only loan. The adjudicator in the case said this should not have prevented him from accessing a new rate.

The adjudicator said: “This has left him in a worse position, having to pay a higher rate, which hasn’t been in his best interests.”

The Ombudsman said the bank should pay the difference between what he paid being paying and the lower rate he should have been on since June 2015. Last week the Ombudsman confirmed it was sticking with its interim decision.

As a result the customer will get a lump sum of around £15,000 – depending on what new product he picks – and £350 compensation. Borrowers are not entitled to new rates by right, the Ombudsman said, but lenders must treat customers making an application fairly.

 

 

Edited by zugzwang

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"

But the implications for Lloyds and other lenders could be far greater, experts say. Chirantan Barua, a banking analyst at Bernstein, the American asset manager, said the Ombudsman’s rejection of the appeal could set a precedent.

He said: “After this ruling, anyone who’s on a rate approaching 4pc is going to run to the bank and ask for a repricing. If what happened here can be applied to the whole of Lloyds’ book of business the impact will be significant.” "

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Why should banks not be allowed to charge customers more in interest for higher risk loans (where the ability to today the capital at the end of the loan is in doubt). Utterly ridiculous. I imagine banks will more proactively want to clamp down on repayment strategies for IO loans going forward?

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I imagine this will force discounted rates up as they will be less profitable since a 2 year discounted rate actually implies unlimited period of discounted rates.

This will have a downwards pressure on house prices.

Possibly.

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25 minutes ago, jfk said:

Wtf

It's very difficult making sense of what actually went on from these articles. A key question would be whether or not they remained on an interest-only mortgage or were proposing to move to repayment. I've had a good look for the Obudsman's decision but can't find it.

Without the detail of the decision all you've got as evidence that some floodgate-breaking precedent has been set is editorialising from the latest teenager wasting a couple of years of their life as one of the Telegraph's personal finance team. These are the same people tell you than when Busta and his mates go bankrupt the rents are going up.

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They didn't refuse him the fixed-rate because he was higher risk or at a high LTV, but because he was failing their affordability tests.

However, given the SVR was costing him £700 a month more than the fixed rate would have, this is clearly a ridiculous and illogical position to take. The ruling makes perfect sense.

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25 minutes ago, Kent Ambitions said:

They didn't refuse him the fixed-rate because he was higher risk or at a high LTV, but because he was failing their affordability tests.

However, given the SVR was costing him £700 a month more than the fixed rate would have, this is clearly a ridiculous and illogical position to take. The ruling makes perfect sense.

No. They're pricing risk.

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Interesting legal principle being set here.  This means that if you agree to pay 500k for a house, and later feel you've been grossly overcharged because the house was last sold for 110k in 1995,  you can get a 390k rebate from the seller. Clearly, paying more  than the last person who bought the house is "not in the buyer's interests" , and he is not being "treated fairly". 

Are FTBs being "treated fairly" when they have to pay twice as much for a house as was the case 10 years ago? And for that matter, are students being "treated fairly" when they are paying 9k a year and 6.5% interest for something that is free in other parts of the UK. 

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Hang on so the customer has a IO loan it came to the end of the so  he had to pay the SVR as he had no plan in place to actually start paying  for the house so they refused  to change to a cheaper rate and this has been judged unfair ..

Wtf

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1 hour ago, Nabby81 said:

Hang on so the customer has a IO loan it came to the end of the so  he had to pay the SVR as he had no plan in place to actually start paying  for the house so they refused  to change to a cheaper rate and this has been judged unfair ..

Wtf

It's a market, except for precious home owning flowers

Edited by Si1

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I would also like to complain about the miserly rate on my savings and would like some compensation. I would also like to take to court anyone who ever said to me to work hard and save. 

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10 minutes ago, Broken biscuit said:

Lenders will simply raise their rates for new borrowers and lend more cautiously.

The financial equivalent of a handbrake turn.

That can only result in lower prices.

Yes

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4 hours ago, Nabby81 said:

Hang on so the customer has a IO loan it came to the end of the so  he had to pay the SVR as he had no plan in place to actually start paying  for the house so they refused  to change to a cheaper rate and this has been judged unfair ..

Wtf

Lloyds had got absolutely stacks of these interest only mortgages. I bet that few can be paid back 

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7 minutes ago, Ah-so said:

Lloyds had got absolutely stacks of these interest only mortgages. I bet that few can be paid back 

Indeed, as per the latest annual report.

Quote

Interest only mortgages


The Group provides interest only mortgages to owner occupier mortgage customers whereby only payments of interest are made for the term of
the mortgage with the customer responsible for repaying the principal outstanding at the end of the loan term. At 31 December 2016, interest only
balances as a proportion of total owner occupier balances had reduced to 31.3 per cent (31 December 2015: 33.9 per cent). The average indexed loan
to value improved to 43.8 per cent (31 December: 46.6 per cent).


New owner occupier interest only mortgages are subject to conservative underwriting criteria with rigorous controls on customers' ability to repay
the principal at the end of term. New interest only mortgages, including those with any element of capital repayments represented 1.9 per cent of
new residential mortgages in 2016 (2.8 per cent in 2015).


For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their
obligations to repay the principal upon maturity of the loan.


Treatment strategies are in place to help customers anticipate and plan for repayment of capital at maturity and support those who may have difficulty
in repaying the principal amount. A dedicated specialist team supports customers who have passed their contractual maturity date and are unable to
fully repay the principal. A range of treatments are offered such as full (or part) conversion to capital repayment, and extension of term to match the
maturity dates of any associated repayment vehicles. 

 

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Does not compute.  As soon as things look like they are starting to fall into place, they just hatch another black swan.

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