The Return Of Interest-Only Mortgages

This weekend, we have seen reports that as the enforced period of mortgage repayment holidays comes to an end on 31st October 2020, interest-only mortgages may be set for a return to provide a solution to borrowers who are under increased financial pressure as a result of Covid-19.

Interest-only mortgages and professional negligence claims against both mortgage brokers and lenders

Interest-only mortgages have had a chequered past. Historically, they have given rise to significant professional negligence claims against both mortgage brokers and lenders.

There was a raft of claims arising out of the sale of endowment mortgages in the 1990s – these consisted of an interest-only mortgage combined with an endowment policy. In many cases, the endowment policies were mis-sold and did not mature at levels sufficient to repay the capital outstanding, leaving homeowners with no way to repay the balance outstanding on their mortgage at the end of the term.

We are also currently seeing the front end of a wave of claims against mortgage brokers in relation to advice that they gave to borrowers between around 2006 and 2014 to take out interest-only mortgages. These claims are gathering pace and are proceeding through the Courts, to the Financial Ombudsman Service and, where the defendant is insolvent or no longer exists, to the Financial Services Compensation Scheme.

The claims are based on individual circumstances but a common theme is the failure to provide advice about having realistic plans for the repayment of the capital at the end of the term with some borrowers relying on the death of a relative to deliver an inheritance or on the rise in house prices which did not materialise leaving borrowers trapped in circumstances where the mortgage will come to an end and they have no realistic alternative other than to sell their homes. At Nelsons, we are actively involved in pursuing these claims for clients.

There are clearly circumstances where interest-only mortgages will be suitable and whilst lenders may now be looking at interest-only mortgages as a way of providing short-term help, borrowers should make sure they take proper advice and understand the long term consequences to them of converting to an interest-only mortgage.

How Nelsons can help

Cathryn Selby is a Partner in our Dispute Resolution team.

If you would like further advice in relation to the subjects discussed in this article, please contact Cathryn or another member of our expert team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.