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ombudsman news

issue 35

February/March 2004

extending the term of repayment mortgages

When they take out a mortgage, borrowers choose the mortgage "term" - the period of time over which they will repay their loan. Often, they choose the longest period available, so as to keep their monthly repayments to a minimum. Frequently, borrowers choose a term that enables them to make their final repayment just before they retire.

Problems can occur if - at some stage after the borrowers first take out their mortgage - lenders extend the term of the mortgage, apparently without the borrowers' knowledge or agreement. Mortgage lending is usually repaid over a long period, so it can often be some years before the borrowers find out what has happened. They are then understandably upset and anxious to discover they are not as far along the road to having paid off the mortgage as they expected. This will be a particular worry if retirement is looming.

Here are some of the most common situations brought to us.

  • borrowers discussed several possible mortgage terms with their lenders when they applied for a mortgage, and believed they had made their choice clear. However, it later became apparent that the lender had put in place a different - and longer - term than the one the borrowers recalled choosing;
  • borrowers have an existing mortgage and take out a further advance. The lender then re-sets the whole of the mortgage lending over an entirely new term.

    The borrowers may say they intended the further advance to be repaid over the remainder of the existing term of their main mortgage. Or they may say that they agreed that the further advance should be on a longer term, but that they had not wanted the term of their main loan to be affected;
  • the lender's mortgage system includes the facility to extend the term automatically if borrowers do not increase their payments after interest rate increases, or if there have been other underpayments on the account;
  • borrowers then say that the lender did not make it clear to them that this would happen and that they believed the mortgage was still being repaid over the remainder of the original term; and
  • borrowers suffered financial difficulty and the lender agreed that they could repay just the interest for a certain period, in order to help them through. When the borrowers started repaying the capital again, as well as the interest, the lender extended the term of the mortgage, so as to minimise the monthly repayments. The borrowers say they were never told of this, and that they assumed they were still repaying within the original term

When we look at complaints involving the first two types of problem listed above, we will want to examine two key documents, the borrowers' application for the mortgage or further advance and the lender's offer. If the offer clearly shows the term that is to be applied, and the borrowers have signed it, then that is usually persuasive evidence that the term is correct and that the borrowers are mistaken in their recollections.

But offers can sometimes be ambiguous, particularly where there has been a further advance. It may be unclear whether the term mentioned runs from when the further advance is made, or from when the original mortgage was taken out and also whether the new term applies to the original loan as well as to the further advance. We generally interpret any ambiguity in favour of the borrower - because it is the lender, not the borrower, who constructs the wording of the offer.

Firms will sometimes say that as the term that the borrowers requested on their application form was not available under the firm's mortgage system at that time, they amended the borrowers' instructions to the nearest equivalent that was available. From the lender's point of view, the borrowers are no worse off - as they could never have had the term they applied for.

However, that does not take into account the question of whether borrowers arranged their finances on the basis of the term they believed was in place - rather than on the basis of the term that was actually arranged for them. If we are satisfied that borrowers have been financially disadvantaged in that way, then we may conclude that they should be compensated for their loss and inconvenience.

Firms often argue that borrowers should have realised - from the size of the repayments they were making - that they would not have paid enough to clear the mortgage within the term they had in mind. However, it is only in rare cases that we think a borrower could reasonably have been expected to know, from their monthly repayments, that they were not paying enough to clear the mortgage within what they assumed to be the mortgage term.

An exception might be where the lender had provided printed illustrations for a new mortgage, clearly showing the repayment for the term the borrowers had chosen, and this differed greatly from the amount the borrowers were paying. In such cases, we may conclude that the borrowers should have realised that the repayments they were being asked to make were incorrect.

Where the extension of the mortgage term has come about because of a feature of the lender's mortgage system, we will need to be satisfied that the borrowers were made aware that their mortgage term would be changed. If, for example, the lender can provide a copy of any information about the change that it sent the borrowers, then that will often persuade us that the borrowers knew of the extension at the time - but may since have forgotten.

But the fact that borrowers were advised, on one occasion, that their mortgage term had been extended is not normally enough to entitle the lender to make later, additional extensions to the term without telling the borrowers what it has done.

It is not unusual for borrowers to ask if they can pay just the interest for a period, to help them over a period of financial difficulties. When the time comes for them to resume paying both capital and interest, the lender may think it will "help" by extending the term of the mortgage, so that the repayments are smaller than they would otherwise have been.

In such cases, it is important that the lender makes it absolutely clear to the borrowers what it is offering to do, and what effect that will have on the time it will take to pay off the mortgage. Ideally, the lender should do this in writing, so that everyone understands the position clearly. Borrowers will not accept that they have been "helped" if they later find that their mortgage payments will continue for years longer than they had expected.

The lender will sometimes argue that the borrowers could not have afforded the higher repayments that would have been required to keep up with the original term. But we will not start from that assumption. If the borrowers were able to keep up with their capital and interest repayments once they recovered from the temporary period of financial difficulty, then we would need to be persuaded that they would not have managed to make the higher repayments needed to repay their mortgage within the original term.

Whatever the reason for extending the term, if we conclude that the lender made the extension and that the borrowers were unaware of it at the time, we will apply the principles explained in our "Redress for Mortgage Underfunding" guidance note when looking at how borrowing should be compensated. The guidance note is available on our website - just click on "technical briefing notes" and scroll down the list until you come to it.

Where a firm has extended a mortgage term without the borrower's authority, and would like to make the borrower a settlement offer, it should use the information in that guidance note as a basis for their offer. It may help to show the guidance note to the borrower as well. However, they should take care to show the full note, not simply to quote parts of it, as excerpts can be misleading when taken out of context.

There will always be cases where a borrower or lender considers that special circumstances warrant a deviation from the general approach outlined in the guidance note. Where the two parties are unable to agree on a fair approach, the case may be suitable for mediation by one of our case handlers.

case studies - extending the term of repayment mortgages

35/7
customers in arrears with mortgage repayments - when firm "capitalised" the arrears it also increased mortgage term, without telling the customers

Mr and Mrs L fell into arrears with their mortgage repayments after Mr L was out of work for some months. Once Mr L got a new job, the couple were able to start paying the full amount that they owed each month. They also made some extra payments to reduce the arrears. Several months after they had resumed their full repayments, the firm invited Mr and Mrs L to a meeting to discuss their mortgage. It offered to "capitalise" the remaining arrears (add them to the mortgage) so that the couple's account would appear up-to-date. Mr and Mrs L were very pleased with this suggestion, and agreed that the firm should go ahead. A few days later, the firm wrote to the couple, confirming that the arrears had been capitalised and telling them what their monthly repayment would be, from the following month onwards.

Five years after Mr and Mrs L started making the repayments at the new monthly rate, they decided to apply to the firm for a further advance, so that they could build an extension to their house. But when they visited the firm to discuss their new borrowing, they were shocked to find that the term of their existing mortgage was more than two years longer than they thought. They discovered that when the firm had capitalised the arrears it had also extended the term of the loan, so as to keep the couple's new monthly repayment broadly the same as it had been before.

Mr and Mrs L were very unhappy. They had not wanted to extend the term of their mortgage and were particularly annoyed that the firm had done this without telling them. They said that they would have preferred to make higher monthly repayments - and could have afforded to do this without difficulty.

complaint upheld
The firm considered that it had helped Mr and Mrs L by extending the term. It also said that the couple must have realised that the term had been altered, as the monthly repayment they were asked to make after the capitalisation did not differ greatly from the amount they had to pay before.

We were satisfied that Mr and Mrs L had not realised that the firm had altered the term. The firm had not given them any indication that it had done this. And we did not accept that the couple were in a position to know, from the size of their monthly repayments, that the mortgage term had changed.

We were also satisfied that Mr and Mrs L could easily have managed the increased repayments, if the firm had left the original mortgage term in place. So we did not accept that the extension had been necessary or helpful. On the contrary, it had denied the couple the opportunity to keep their mortgage to their chosen term.

We explained this to the firm, and asked it to compensate Mr and Mrs L in accordance with our "Redress for Mortgage Underfunding" guidance note.

35/8
customer has 25-year mortgage - firm extends the term, without customer's knowledge, each time customer takes out a further advance

Mr W took out a repayment mortgage with his firm in order to buy a house. He was gradually renovating the place and took various further advances during the first five years of the mortgage, in order to pay for the improvements.

Once the renovations were complete, Mr W started making extra repayments of £250 a month, with the intention of paying off his mortgage more quickly. He hoped to retire early and did not want to have any mortgage debt still left to pay after he stopped work.

It was nearly two years after he had been making these extra repayments when Mr W found out that the remaining term of his mortgage was almost five years longer than he had thought.

It transpired that each time Mr W had applied for a further advance, the firm had put the whole of the borrowing on a new 25-year term. He had assumed that when he had written "25-year term as before" on the application form, the firm would have understood this to mean that he wanted to pay off the additional borrowing within the 25-year term of his original mortgage. He had no idea that it had been extending that original term each time it had given him an advance.

Mr W complained to the firm, but it did not agree that it was responsible for the problem, so he came to us.

complaint upheld
The firm considered that Mr W had "got the terms he asked for", and that he was, in any event, well ahead of schedule in repaying his loan. So it did not accept that he had been caused any real loss by what had happened.

We thought that the questions on the firm's application form were confusing, particularly in relation to the customer's required term. The form also failed to make clear that the whole of the existing mortgage loan (not just the further advance) would be spread over the term that the customer requested when applying for the further advance. So we did not agree with the firm that Mr W had "got the terms he asked for".

We were satisfied that Mr W could have paid the higher repayments needed to pay off all of his borrowing within the remainder of the original 25-year term. And we were satisfied that he could also have continued making his additional, voluntary monthly payments of £250 to help pay off his mortgage as quickly as possible. So we considered that he had suffered a loss as a result of the firm's extending the mortgage term, since he would have been still further ahead with his repayments if it had left the original term unaltered.

We told the firm to compensate Mr W, in accordance with our "Redress for Mortgage Underfunding" guidance note.

35/9
whether firm at fault for following solicitor's instructions to extend mortgage term at same time as firm transferred mortgage from joint names to sole name

Three years after Ms B and her partner took out a 20-year joint mortgage from the firm, they split up. They agreed that Ms B would keep the flat and that the mortgage would be transferred into her sole name. Ms B's solicitor liaised with the firm and prepared the forms needed to transfer the mortgage into Ms B's sole name. The transfer was completed within a few months.

Two years after that, Ms B started looking into the possibility of moving her mortgage to a different firm. She was surprised to find that the amount outstanding on the mortgage did not appear to have gone down much since it had been transferred to her sole name.

She made some enquiries and discovered that the firm had placed the mortgage on a new 25-year term at the time of the transfer. She complained to the firm, saying she had not wanted it to extend the term and had not asked it to do this. She added that the firm should have realised that the new term would not be suitable for her, so should have discussed this with her before making the change.

The firm did not agree that it had done anything wrong. It said it had simply put in place the mortgage term asked for on the transfer forms. It also said that it was not reasonable to expect it to question the advisability of extending the term, given that Ms B's solicitor had been acting for her.

complaint rejected
When the complaint was referred to us, we looked at the transfer forms. They clearly stated that Ms B wanted a 25-year term, from the date of the transfer. We accepted that it was Ms B's solicitor - not Ms B - who had completed the forms, but she had signed them. We did not consider that, in these circumstances, the firm had any duty to query the length of the term requested.

The monthly repayment that the firm had asked Ms B to make after the transfer was appreciably lower than the amount she had been paying before. We felt that as Ms B was an accountancy professional, she should have realised that this was significant and should have queried it at the outset if it did not tally with her understanding of the new arrangements.

Ms B was clearly very disappointed that she had not paid off as much as she would otherwise have done in the years that followed the transfer. However, we did not consider that the firm was to blame. We were satisfied that it was entitled to act on the signed forms that it received from Ms B's solicitor. We therefore rejected the complaint.

Walter Merricks, chief ombudsman

ombudsman news issue 35 [PDF format]

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.