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ombudsman news

issue 121

October 2014

lifetime mortgages and financial hardship

Even though equity release makes up a relatively small proportion of our mortgage caseload, we’re still asked to step into a number of complaints every year.

Because these disputes generally involve large amounts of money - and the borrowers might have died - they can be very stressful and upsetting for the people involved. With figures suggesting the equity release market is growing, it’s important that financial businesses know how to sort out any problems as fairly and sensitively as possible.

Our case studies look in particular at lifetime mortgages - the most common type of equity release. Lifetime mortgages are generally available to people aged over 55 or 60, and are designed to be repaid when the consumer dies or goes into long-term care. Before then, they can either draw a regular income from the loan or take a lump sum - for example, to use for home improvements.

If someone tells us that they don’t think a lifetime mortgage was right for them - or for someone who has died - we’ll carefully consider the consumer’s circumstances at the time, and whether the advice they received was appropriate. We’ll also consider how clearly the arrangement was explained - including the effect on any state benefits the consumer might have been entitled to.

Lifetime mortgages are a relatively expensive form of borrowing. So we might uphold a complaint if we find that the consumer could have raised the money they wanted in a different, less expensive way.

Although interest is charged on the loan, consumers don’t generally pay this off - instead, it’s rolled into the amount to be repaid. Repaying a lifetime mortgage early means paying back both the loan and the interest - and usually significant early repayment charges.

Because of these high costs, we might uphold a complaint if we see evidence that the consumer always intended to repay the mortgage early - for example, because they’d planned to move house.

If we decide that a lifetime mortgage should never have been sold, we’ll tell the business to put the consumer - or their estate - in the position they would be in if they hadn’t taken it out. We’ll need to take into account whether the consumer spent any of the money - and also whether they paid any set-up fees and charges.

We also continue to see mortgage complaints involving financial hardship. So we take a look at some examples of these - with a particular focus on how apparently small errors can have a very large impact on a consumer. Our approach to these cases is set out on our website - along with guidance on how to compensate consumers for the non-financial consequences of a mistake.

We published more case studies about equity release in issue 72 of ombudsman news. Our online technical resource also provides more information on our approach to mortgages in arrears and financial hardship.

issue 121 index of case studies

  • 121/7 - consumer complains that mortgage hasn't been switched to interest-only
  • 121/8 - consumer complains that mortgage company hasn't compensated him for the upset caused by their mistake
  • 121/9 - attorney complains that consumer shouldn't have been sold a "lifetime" mortgage
  • 121/10 - consumer complains that she and her husband hadn't understood the terms of the lifetime mortgage they were sold
  • 121/11 - consumer complains about advice to take out a lifetime mortgage - saying he could have used pension lump sum
  • 121/12 - consumer complains that mortgage company won't capitalise mortgage arrears

121/7
consumer complains that mortgage hasn't been switched to interest-only

When Mrs N was diagnosed with throat cancer, she had to give up work. Even though she was receiving some income support, she knew she wouldn’t be able to meet her mortgage repayments. She was having trouble talking because of her illness, so she asked a friend, Miss M, to call the mortgage company to see what they could do.

The mortgage company and Miss M discussed Mrs N’s situation for some time. Worried she’d forget something important, Miss M asked if Mrs N could be sent a letter confirming what had been said. Shortly afterwards, Mrs N received a letter explaining the option of switching from a repayment mortgage to interest-only.

Mrs N thought this sounded like a good idea. She’d heard about a scheme where the Department for Work and Pensions (DWP) would pay interest directly to the mortgage company. So if her mortgage was interest-only, her monthly repayment would be covered.

Miss M called the mortgage company to confirm the change would go ahead. She was told the “right team” wasn’t available to talk - but that a letter would be sent to Mrs N. When the letter didn’t arrive, Miss M called again to ask whether Mrs N should cancel her direct debit as the DWP was now willing to pay her mortgage interest. She was told that Mrs N should go ahead.

So Mrs N cancelled her direct debit - and as she didn’t hear anything more from the mortgage company, she assumed everything was working as it should.

Three months later, Mrs N received a letter from the mortgage company saying she was in arrears. When Miss M called to ask what was going on, she was told that because Mrs N hadn’t replied to the original letter, her mortgage hadn’t been switched to interest-only. So while the DWP payment was covering the interest, there was still an amount outstanding each month.

When Miss M complained, she was told that Mrs N’s mortgage would be switched to interest-only from the next month. But the mortgage company refused to clear the three months’ arrears that were already on the account - saying Mrs N hadn’t confirmed she was happy to change over.

Frustrated - and worried about the impact on her credit file - Mrs N asked us to step in.

complaint upheld

We needed to establish what exactly Miss M and Mrs N had been told - and whether they or the mortgage company were responsible for the switch not happening.

We asked the mortgage company for a recording of Miss M’s first call to them, asking what they could do to help Mrs N. It turned out switching to interest-only wasn’t the only thing the mortgage company had suggested at that time. They’d also talked through other options with Miss M, including extending the mortgage term and getting help from the DWP.

We could see why Miss M had thought it best for the conversation to be confirmed in writing. It was a lot of information to expect her to remember - and it was important that Mrs N got all the details of each of the available options.

But when Mrs N showed us the letter she’d received, we found it didn’t reflect the conversation Miss M had had with the mortgage company. The only option the letter mentioned was changing the mortgage to interest-only. It began: “Please find detailed information regarding a transfer to pay the interest only on your account on a temporary basis”.

We also noted that the letter didn’t say that Mrs N needed to do anything to confirm the change. In light of this, we thought it was understandable that she thought the change would go ahead - and that she hadn’t replied.

We asked the mortgage company whether they’d followed up the letter. From the records we saw, it appeared that they’d tried unsuccessfully to phone Mrs N shortly afterwards - but hadn’t tried again. They hadn’t returned Miss M’s call or sent a confirmation letter as they’d said they would. They’d told Miss M that Mrs N could cancel her direct debit. But they’d waited until Mrs N’s account was three months in arrears before writing to her.

It seemed that Miss M and Mrs N had gone to a lot of trouble to make the mortgage company aware of Mrs N’s situation - and to make sure that Mrs N’s mortgage would be paid. On the other hand, it seemed that the mortgage company’s communication had been very poor - especially given that they knew Mrs N was ill and needed their support.

In all the circumstances, we decided that the mortgage company - not Mrs N - was responsible for her mortgage not changing. So Mrs N wasn’t responsible for the arrears on her account.

We told the mortgage company to rework Mrs N’s mortgage account as if it had been switched to interest-only the month after Miss M first called them. That meant refunding any arrears fees that had been applied since then - and making sure Mrs N’s credit file wasn’t affected.

We also told the mortgage company to pay Mrs N £600 to reflect the distress their actions had caused at what they had known was a very difficult time.

121/8
consumer complains that mortgage company hasn't compensated him for the upset caused by their mistake

Mr D was signed off work with severe depression. His income fell significantly - and he began to have trouble covering his mortgage.

Mr D approached a local mental health advocacy service, who got in touch with his mortgage provider - his bank - to explain the situation. It turned out that Mr D’s mortgage was already interest-only, so switching to interest-only wasn’t an option. But the advocate managed to agree a temporary repayment break, which meant Mr D wouldn’t have to pay anything for three months. After that, he’d start repaying the interest as usual.

Shortly after the repayment break finished, Mr D’s debit card wouldn’t work in the supermarket. When he went into his bank branch to find out what was wrong, he discovered that a very large mortgage payment had been taken from his current account. But there hadn’t been enough money to cover it all. And with nothing left in the account, several other direct debits and standing orders had failed - which in turn had caused charges to be applied.

Mr D was extremely upset. He got in touch with his advocate, who complained on his behalf to the bank. When the bank looked into what had happened, they admitted they’d made a mistake. They said that when Mr D’s payment holiday ended, they’d accidentally started taking capital repayments as well. It was just a matter of a wrong entry on their system. But the total repayment had been three times the interest-only amount that Mr D had been expecting.

The bank said they’d sent Mr D two letters reminding him that his payment break was due to end, and setting out the amount they’d be taking. They said that if he’d questioned the amount at that point, then the problem wouldn’t have arisen. But they offered to pay back the extra money - as well as the £35 arrears fee that they’d applied. They also said they’d cover any bank charges that Mr D had run up.

Mr D didn’t think this was enough. He felt the bank didn’t appreciate his situation and the stress their actions had caused. He asked us, through his advocate, to put things right.

complaint upheld

We looked carefully at the refund that the bank had given Mr D. And we checked that, in terms of overpayments and charges, he wasn’t out of pocket. But we explained to the bank that we also needed to consider whether their mistake had had a non-financial impact on Mr D.

We confirmed with Mr D that he’d been receiving treatment for severe depression - including regular appointments with his doctor and community mental health team. He told us that he’d approached the advocacy service for support because he didn’t feel he could cope with having conversations about his finances with the companies involved.

In our view, it was clear that Mr D had been having a very difficult time. The bank had been aware of this, because he’d explained it to them.

Mr D told us he hadn’t received the letters the bank said they’d sent. He said it might be because he’d recently split up with his wife, and had moved out of the house the mortgage related to.

When we asked to see the bank’s records, we saw that Mr D’s wife had got in touch when the letters arrived - and had tried to let them know where Mr D was living. But the bank had refused to speak to a “third party”.

We understood that the bank had done this for security reasons. But we thought they could have got in touch with Mr D through his advocate - who had Mr D’s signed permission to deal with his mortgage.

Mr D told us how humiliated he’d been when his card was declined in the supermarket. And we could understand how stressed and anxious he’d felt when his bank account was cleared out. He’d had to get in touch with the council and several utilities companies who hadn’t been able to take their regular payments. He said he’d been feeling bad enough already, and the hassle with his mortgage was the last thing he needed.

When we pointed all this out to the bank, they said they hadn’t appreciated how much their administrative error had affected Mr D. They apologised - and were able to reach an amount of compensation that Mr D was happy with, based on the guidance on our website.

The bank also said they’d put Mr D in touch with their specialist team - who could help him manage his mortgage and bank account until his situation improved.

121/9
attorney complains that consumer shouldn't have been sold a "lifetime" mortgage

Mrs K hadn’t worked for some years. And Mr K was hoping to retire in the near future - which would mean winding down his business and paying off its debts. So they decided it was finally time to sit down and sort out their finances.

A friend of the couple had recently signed up to an equity release scheme, and passed on the company’s details. After discussing his circumstances with an adviser, Mr K agreed to take out a “lifetime” mortgage against his home. He borrowed £180,000 in all - about a third of the value of the house.

Unfortunately, both Mr and Mrs K experienced poor health over the next few years. Mrs K developed dementia, and Mr K had several physical health problems. Eventually, both of them were relying on home care visits.

Mr K’s niece, Miss L - who had power of attorney for Mr and Mrs K’s affairs - contacted the mortgage company. She said she’d been reviewing the couple’s finances - and had serious concerns about the lifetime mortgage.

Miss L felt that Mr and Mrs K hadn’t really needed the money - and hadn’t understood what they were signing up to. In particular, she said they hadn’t been made aware of the tax implications. The couple’s health problems meant they needed to move into a smaller, more manageable property - and Miss L was unhappy that an early repayment charge would apply.

The mortgage company looked into Miss L’s complaint. When they stood by their advice, she asked us to step in.

complaint not upheld

Miss L told us that Mr K didn’t remember much about the meeting. But he felt that the mortgage company hadn’t properly explained what a lifetime mortgage involved - especially the downsides. To decide whether this was the case, we needed to establish what had been said in Mr K’s meeting with the adviser.

We asked the mortgage company for their written records of the meeting. According to these, Mr K and the adviser had gone over the money he thought he’d need - first to pay off his business’s debts, and then in his retirement. The records said that Mr K had mentioned refitting his kitchen, and that he’d like to set some money aside for yearly holidays with Mrs K.

When we asked Miss L about these plans, she confirmed that Mr and Mrs K had improved their kitchen. And they had taken holidays while they were still physically able to. But she felt that Mr and Mrs K would have had enough money to do these things anyway - as when they took out the mortgage, they’d had considerable savings.

But when we considered the “fact find”, there was no evidence that these savings had been mentioned. In fact, the adviser had noted that while Mr and Mrs K had had a lot of equity in their home, they’d had very little cash and savings.

Given that Mr K wanted to pay off his business debts, to have enough money to retire on and to take regular holidays, we didn’t necessarily think the amount of the loan was unsuitable. In our view, the adviser could only base their advice on the information they were given.

We also saw from the records of the meeting that Mr K’s business accountant had been at the meeting - and had asked some questions to clarify Mr K’s tax position. And the mortgage company sent us a letter that they’d sent Mr and Mrs K after the meeting, setting out in detail what had been said and recommended. We noted that the couple had had two months to decide whether to go ahead.

In light of this, we thought Mr and Mrs K would have had enough time and information to consider whether the lifetime mortgage was right for them. They’d also had a financial professional on hand to clear up anything they weren’t sure about, including the impact on their tax affairs.

Finally, we turned to Miss L’s concerns about the early repayment charge. If Mr and Mrs K’s health problems had already begun when they took out the mortgage, we would have expected the adviser to take into account the possibility that they might need to sell their home. But there was nothing to suggest they were having problems at that point.

We carefully considered the terms of the mortgage - and noted that the early repayment charge was clearly mentioned. But whether it applied would depend on the circumstances.

We explained to Miss L that if the charge was applied - and she thought it shouldn’t have been - she could raise this separately with the mortgage company. And if she wasn’t happy, we’d look into it.

We understood that Miss L was trying to do the right thing by Mr and Mrs K. And we were very sorry to hear they were both in poor health. But we decided that, based on what we’d seen, they hadn’t received unsuitable advice. We didn’t uphold the complaint.

121/10
consumer complains that she and her husband hadn't understood the terms of the lifetime mortgage they were sold

Mr and Mrs R were in their early seventies and retired. They each had a private pension, but decided to find out how they might increase their income.

During a meeting with a financial adviser, Mr and Mrs R agreed to take out a lifetime mortgage of £100,000. Following the adviser’s recommendation, they cashed in their endowment policies to pay off their existing mortgage. Over the next few years, they used some of the money to buy a new car, refit their bathroom and kitchen, and visit family in New Zealand.

Eight years after taking out the lifetime mortgage, Mr R died. Mrs R, alone in a three-bedroom house, decided she’d prefer to buy a small flat in a nearby retirement village - which meant paying off the lifetime mortgage.

At that time, around £50,000 of the loan was still left. But because she wasn’t moving into long-term care, Mrs R had to pay an early repayment charge of £25,000. Adding the interest that had accumulated over the years, paying off the mortgage cost her nearly £250,000.

Horrified at this amount, Mrs R complained to the financial adviser. She felt the terms of the mortgage hadn’t been properly explained to Mr R, who’d dealt with all their financial affairs at the time. They hadn’t understood how the compound interest would rack up.

Mrs R said that Mr R had thought - and had explained to her - that the arrangement was just like an ordinary bank loan. She said he wouldn’t have gone ahead with it if he’d known how things could turn out.

But the adviser defended their recommendation - and the complaint was referred to us.

complaint upheld

Because it had been Mr R who met with the adviser, we didn’t have an account from the customer’s perspective of what had been said. But we thought the way he’d described the loan to Mrs R was probably a good indication of how he’d understood it.

However, that didn’t necessarily mean the adviser had done anything wrong. We needed to establish what the couple’s circumstances had been at the time, and whether they’d received appropriate advice.

We carefully considered the information that the adviser had recorded about Mr and Mrs R’s finances. It appeared that their outgoings had been around £1,000 each month - including their existing mortgage, which had had three years left to run. They’d also had around £35,000 in various savings accounts and premium bonds.

So overall, Mr and Mrs R had been in a fairly comfortable situation. Although they’d had a mortgage, they’d had endowment policies in place to pay it off. After their outgoings, they still had around two thirds of their income left each month.

We noted that, eight years on, half the money raised by the lifetime mortgage hadn’t been spent. And the part that had been used had been spent in fairly small amounts. Looking at the couple’s financial position, we thought they could have afforded these expenses without the loan. Even if Mr and Mrs R had needed extra money, we thought there would have been cheaper ways of getting the small sums they were spending each time.

In our view, paying off their existing mortgage with their savings and replacing the capital by releasing equity was a very expensive way for Mr and Mrs R to raise money. It cost them far more than keeping up the repayments on their existing mortgage, which they weren’t struggling to do. And after three years, their existing mortgage would have been repaid - and their monthly outgoings would have reduced anyway.

In all the circumstances, we decided Mr and Mrs R should never had been sold the lifetime mortgage. So we needed to make sure Mrs R wasn’t out of pocket.

When she sold her house, Mrs R had been left with considerably less equity than she would have had if the couple hadn’t taken out the lifetime mortgage.

So we told the adviser to pay the difference between a) the balance of the sale that went ahead, and b) what the balance would have been if Mrs R hadn’t had to pay off the lifetime mortgage - taking off what the couple had already spent.

121/11
consumer complains about advice to take out a lifetime mortgage - saying he could have used pension lump sum

When Mr and Mrs C were in their early sixties, they decided to buy a motorhome so they could take their grandchildren on holidays. Mr C searched online for ways they might get some extra money, and came across a website talking about equity release. Thinking this might be an option, he phoned the company and arranged a meeting with one of their advisers.

During the meeting, the adviser recommended that Mr and Mrs C take out a lifetime mortgage. They agreed to borrow £25,000 - which they used to buy a motorhome as they’d planned.

At that time, Mrs C had already retired, and Mr C was still working part-time. When Mr C retired a couple of years later, he decided to pay off the lifetime mortgage using a tax-free lump sum from his pension. But he was taken aback at the how much he owed - around £40,000.

Mr C felt he’d received bad advice - and complained to the equity release company. He said that he hadn’t realised until he retired that he could have taken his lump sum ten years earlier, aged 55. But he couldn’t remember the adviser even asking about his pension.

He felt, looking back, this would have been a far better move than taking out the lifetime mortgage. He didn’t think it was fair he was having to pay so much interest and an early repayment charge for something he hadn’t needed in the first place.

The company replied that the push to take out a lifetime mortgage had come from Mr C - not their adviser. They said Mr C hadn’t mentioned his pension - or that the couple had any other way of funding the motorhome. So in their view, the adviser hadn’t done anything wrong.

However, Mr C disagreed - and asked us to step in.

complaint upheld

To decide whether the adviser’s recommendation had been right for Mr and Mrs C, we needed to find out more about their circumstances at the time. So we asked the equity release company for their records of the meeting with Mr C.

We saw from the records that the ability to repay early was listed as one of the couple’s priorities. In fact, the adviser’s notes suggested that Mr C had said he was likely to do this.

In light of this, we weren’t sure that a lifetime mortgage was right for Mr C. It was clear he had wanted flexibility - and something for the short term. But lifetime mortgages are designed to be repaid only when the person taking it out dies or moves into long-term care. As Mr C had found out, the interest and charges means repaying them early can be very expensive.

Mr C thought the adviser should have suggested taking a lump sum from his pension. So we looked at what had been said in the meeting about other possible ways to raise the money for the motorhome.

We found that the adviser had noted that Mr C planned to work until he was 65. It was also noted that if one of the couple died, their pension arrangements meant the other would have enough to live on.

This strongly suggested that the adviser had known about Mr C’s pension. But it didn’t seem that the adviser had looked into - or mentioned to Mr C - the option of taking a lump sum. This would have been far less expensive. We thought that if the adviser had told Mr C he could take the lump sum, he would probably have chosen that over the lifetime mortgage.

Given everything we’d seen, we decided that Mr and Mrs C had been wrongly advised to take out a lifetime mortgage.

To make sure they weren’t out of pocket, we told the equity release company to refund them the extra they’d paid to get the money for their motorhome that way - rather than by taking a lump sum. This was the difference between the original £25,000 and the money they’d had to pay to redeem the mortgage - plus 8% interest.

We also told the company to refund with interest the fees and charges Mr and Mrs C had paid to set up the mortgage.

121/12
consumer complains that mortgage company won't capitalise mortgage arrears

Miss S had to take several months off work with depression. Unfortunately, she began to have trouble paying her bills - including her mortgage, which fell into arrears. Worried about what could happen, she phoned the mortgage company to see if there was anything they could do.

The mortgage company explained that there were two ways they could help. The first was by “capitalising” the arrears - adding them to the original loan. This would increase Miss S’s monthly repayment, but prevent arrears charges from being applied to the mortgage.

The second way was switching the mortgage from a repayment mortgage to interest-only - which would reduce Miss S’s monthly repayment. But the arrears would stay on the account, with charges applied each month that they remained outstanding.

Miss S said she’d think about how to go ahead - and would phone the mortgage company back to let them know. But a couple of days later, she received a letter from the mortgage company, referring to the phone call and saying she needed to pay £75 to go ahead with the arrangement.

Miss S hadn’t been expecting to hear anything so soon. But she wanted to get her financial situation sorted out as quickly as possible - so sent off a cheque the next day.

However, the next month, Miss S received a phone call from the mortgage company - reminding her that her account was in arrears and asking her to pay. Miss S was very confused. She explained that she thought she’d paid a fee to capitalise her arrears.

When the mortgage company checked their records, they told Miss S that her mortgage had been switched to interest-only - and that was what the fee had been for. But they said the arrears hadn’t been capitalised, so she’d need to pay them - as well as the fees and interest on top.

Miss S felt the mortgage company had misled her about what was happening to her account - so it was their fault the arrears were still there. The mortgage company admitted they could have communicated the situation better to Miss S. But they said they wouldn’t capitalise the arrears until she’d paid at least some of them back.

Miss S knew she couldn’t afford to pay back what the mortgage company was asking for. Increasingly worried, and not sure what to do, she visited her local Citizens Advice Bureau. With the bureau’s help, Miss S complained that she hadn’t been treated fairly.

But the mortgage company didn’t reply to the complaint. Instead, they continued to phone Miss S about her debt - and to apply interest and charges to her mortgage. 18 months after Miss S had first contacted the mortgage company, she asked us to step in - saying she was at her wit’s end.

complaint upheld
We could see there’d been a breakdown in communication between Miss S and the mortgage company. We needed to decide if the mortgage company had done anything wrong - and if they had, what impact this had had on Miss S.

We asked the mortgage company for the letter they’d sent to Miss S after she’d first called them. We found that this didn’t specifically mention capitalising the arrears. But we didn’t think it was sufficiently clear from the letter that the fee only related to changing the mortgage to interest-only. As the letter began “Further to our conversation…”, we could see why Miss S had thought the fee was for both options that the mortgage company had mentioned.

We noted that at the end of the phone call, Miss S had said she’d get in touch with the mortgage company - so the letter had been unexpected. We could understand - given how worried she’d been about her finances - why she’d replied straight away without questioning the fee.

We asked to see Miss S’s payment history. From the records the mortgage company sent, we saw that, since she first phoned them, she’d made full repayments every month. That meant her arrears hadn’t grown over that time - but the mortgage company had continued to add fees and charges to them.

Miss S sent us bank statements and bills she was behind with. It looked like she was having a lot of trouble with her finances - and we were pleased to hear that Citizens Advice and a debt charity were helping her sort things out.

In our view, Miss S had gone to a lot of effort to keep up with her mortgage repayments. And we agreed with her that it wasn’t fair for the mortgage company to expect her to pay off her arrears.

She’d been paying her mortgage - so the arrears, apart from the fees and charges, weren’t any larger than when the mortgage company had offered to capitalise them. We could appreciate how frustrating this must have been for Miss S.

We asked to see the mortgage company’s records of their contact with Miss S. We found they’d received the complaint - as well as Miss S’s authority to talk to Citizens Advice about it. We also noted that Miss S had told them about her depression in her first phone call. We were concerned that the mortgage company hadn’t acknowledged the complaint. And given Miss S had been honest and upfront about what she was going through, we thought they’d acted insensitively.

In all the circumstances, we decided the mortgage company should refund all the charges they’d applied to Miss S’s account since she first got in touch with them. We told them to capitalise her arrears as they’d initially offered - and to make sure her credit file didn’t reflect any fees and charges that had been unfairly applied.

The mortgage company also agreed to compensate Miss S to make up for the unnecessary worry caused by their poor communication and handling of her complaint.

image:ombudsman news

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.