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.
June / July 2008
Many of the complaints we see involving mortgages have arisen because of a difference between how customers expect their mortgage to work, and how it works in practice. Most people who take out a mortgage have some idea how it operates. However, relatively few mortgage customers have much understanding of the technicalities. Without first asking their lender, for example, many mortgage customers would be unable to say in detail exactly what practical effects a change in their mortgage arrangements would bring about.
Because a mortgage loan is usually for a large amount of money, quite small changes can - over time - make a significant difference in money terms. So mortgage customers can sometimes end up with a very unwelcome surprise if they have not fully understood what the consequences of a change would be. This is even more likely to be the case for customers who are experiencing financial difficulty and have limited options.
We are sometimes disappointed that the mortgage lender did not make greater efforts to explain matters to their customer when a problem or query first arose.
Even where lenders do attempt to explain matters, we see cases where they have failed to address an important point - or have given the customer an explanation that was wrong. In a fair number of disputes it seems to us that more effective communication on the part of the lender might well have prevented the complaint from arising in the first place.
Shortly after her husband's death, Mrs C wrote to her building society about her mortgage. She had taken this out jointly with her husband some years earlier, and was now thinking of paying off the remaining balance.
The building society kept Mrs C waiting some while before it responded to her letter and she was totally confused by the information it sent her. After making further enquiries, she was surprised to discover that - at some point - the building society had changed the basis on which the mortgage was set up, transferring it from interest-only to capital and interest.
Mrs C had been quite unaware that there had been any change to the mortgage. She asked the building society to explain exactly what had happened, but despite sending several further letters she encountered considerable difficulties in getting any more information.
Mrs C eventually paid off the remaining mortgage balance, having by then been in correspondence with the building society for almost a year. When she complained about the poor service she had received, the building society agreed that it had not dealt well with her enquiries. It accepted her point that she would have paid off the mortgage a year earlier - had it dealt with her queries right away. It therefore refunded the interest she had been paying on her mortgage over the past year. It also made a separate refund of interest totalling almost £700 and gave her £200 for the inconvenience it had caused her.
However, Mrs C still felt uneasy about the situation because the building society had never explained exactly what had happened to the mortgage. She therefore brought her complaint to us. She said she had serious doubts about the way the mortgage had been administered. She also told us she thought the building society had a general policy of altering mortgage arrangements without its customers' knowledge.
complaint upheld in part
The building society's records for the mortgage account showed that it had transferred the mortgage from an interest-only to a capital and interest basis around a year before Mr C's death.
We noted that, a few weeks before the change had been made, Mr and Mrs C had written to the building society about one of the endowment policies supporting their mortgage. That policy was reaching the end of its term and we thought the mortgage arrangement had probably been changed after the building society misinterpreted what the couple said about the policy in their letter.
Our investigations enabled us to reassure Mrs C that the building society did not have a general policy of transferring mortgages without their customers' knowledge, as she had feared.
We explained to Mrs C that she had, in fact, benefited from the change. Although the monthly payments had increased, they had still been easily affordable. And the higher repayments had the effect of slightly reducing the balance on the loan - something that would not have happened if the basis of the mortgage had remained the same. Mrs C had also been paying less interest since the change. Until we pointed these things out to her, Mrs C had not realised that there had been any positive aspects to the situation.
The building society offered to pay Mrs C an additional £200 for the inconvenience it had caused her. We told her we thought this represented a fair outcome and we recommended that she should accept the offer.
Mr and Mrs A had been in financial difficulty for some while and had fallen seriously behind with their mortgage repayments. They had been trying for nearly a year to sell their house - or to rent it out - but had no success.
Accepting that they had little realistic prospect of repaying the mortgage arrears, they resigned themselves to giving up their home. They handed in the keys to the building society and moved in with Mrs A's mother.
Just over two years later, a friend of the couple told them he had seen their former home listed on a property website. The house appeared to have been sold in the past couple of months. When Mr and Mrs A contacted their building society it confirmed that the sale had gone through very recently. However, it told the couple that the proceeds of the sale had not covered all of their mortgage debt - so they still owed the building society £6,300.
Mr and Mrs A were alarmed by this news, as they had thought their responsibility for the arrears came to an end when they handed back the keys of their house. They said it was unreasonable of the building society to expect them to pay the outstanding amount. In their view, the house should have attracted a high enough price to pay off all the outstanding debt. They said it was the building society's fault that this did not happen - because it had taken so long to put the house up for sale.
The couple were also concerned that the building society had not kept them informed about the sale of the property. They said they thought it "very suspicious" that they had not been asked to sign any papers relating to the sale.
Unable to resolve matters with the building society, Mr and Mrs A referred the dispute to us.
complaint upheld in part
The building society was unable to explain its delay in putting the property on the market. However, we were satisfied from the evidence that, once it set out to sell the house, it had obtained proper valuations and had achieved the best price reasonably available at the time.
In the particular circumstances of this case, we could not see that Mr and Mrs A had been caused any loss. There was nothing to back up their view that the building society would have got a higher price by selling the house right away. The house had been on the market for over a year by the time the couple decided to hand in the keys. The few offers they received in that time had been very disappointing and - if they had accepted any of them - they would probably have been left with a shortfall, after the sale, of around £13,000.
Part of Mr and Mrs A's dissatisfaction stemmed from their assumption that the interest on their mortgage debt would stop once they handed in the keys. They had also expected the building society to contact them and obtain their signatures before selling the house. We explained that handing in the keys to a mortgaged property does not, of itself, stop interest accruing on the mortgage account. We also explained that as they had handed back their house voluntarily, the building society had not been obliged to get their signatures on the sale papers.
But we agreed with Mr and Mrs A that the building society should have kept them informed about the sale. And we thought the building society should have taken more trouble to ensure they fully understood the implications of handing back the keys of their house. It was unlikely that this would have made the couple alter their plans. But it would at least have spared them some of the surprise and dismay they felt when they were subsequently asked to repay the shortfall.
We did not agree with Mr and Mrs A that the building society should take responsibility for the shortfall. But we arranged for the building society to reinstate its offer of an interest concession, which Mr and Mrs A had refused when the building society had first suggested it. We said that the building society should also reduce the debt by £300 to compensate Mr and Mrs A for the inconvenience caused by its poor communication.
The terms and conditions of Miss G's mortgage allowed her to make additional capital repayments of up to £500 each month - without incurring any charge. She was also able, each January, to make one additional capital repayment of at least £1,000 - again without charge.
In January 2008 she decided to make an extra capital repayment of £1,000 – and on 16 January she sent her lender a cheque for this amount. On 30 January she made her normal monthly repayment of £501.79 by direct debit.
After receiving her next mortgage statement, Miss G contacted her lender to complain. She said it had "overcharged for interest on the January overpayments of £1,501.79", with the result that her monthly repayment from February was more than it should have been.
complaint not upheld
We looked carefully at what Miss G's mortgage agreement said about overpayments. This clearly stated that, for interest purposes, monthly overpayments took effect from the first day of the following month, while interest took effect immediately on larger overpayments that were made annually.
We were satisfied that the lender had treated Miss G's payments in January 2008 correctly; her overpayment of £1,000 reduced her interest immediately. The problem seemed to stem from her mistaken assumption that the total amount she had paid in January was an overpayment. In fact, the payment of £501.79 was simply her regular monthly repayment, which did not qualify for special interest treatment.
We explained this to Miss G and sent her a simple calculation to show that the interest had been treated correctly and that the balance carried forward on her account for February 2007 was correct. This had been shown on her annual statement in March 2007, but we did not think that the lender's covering letter, sent with the statement, explained the figures as well as it might have done. And unfortunately the lender's subsequent correspondence with Miss G failed to explain the situation clearly enough to reassure her and settle matters at that stage.
Ten years after taking out an interest-only mortgage supported by an endowment policy, Mr and Mrs W unexpectedly inherited some money and decided to pay off their mortgage.
When they checked through their mortgage paperwork they were alarmed to discover that the endowment policy supporting their mortgage had been set up for a 20-year term. The mortgage itself had been arranged with a 25-year term.
Mr and Mrs W wrote to the lender complaining of "mis-selling", on the grounds that the terms of the mortgage and of the endowment policy did not "match". The lender's response focused in some detail on why it did not think any mis-selling had taken place. However, it failed to address the couple's specific concerns about the length of the loan not "matching" that of the endowment policy. The couple remained worried about this and, unable to obtain any more information from their lender, they eventually brought their complaint to us.
At the time the mortgage had been set up there was no requirement for mortgage lenders to keep detailed records. The paperwork suggested that Mr and Mrs W had probably asked for the 25-year term, but there was no indication of whether the lender had discussed this with them.
But regardless of why the terms of the mortgage loan and the endowment policy differed, the main point as we saw it was that the difference had not disadvantaged Mr and Mrs W in any way. They paid only the interest on their loan, so their monthly repayments would have been the same no matter what term they chose. And the endowment policy was well on track to produce enough - at the end of its 20-year term - to repay the outstanding mortgage loan.
We explained all of this to Mr and Mrs W and told them that as they had not suffered any loss or damage we did not think we should investigate any further. Reassured by our explanation, the couple agreed that they had no need to pursue the complaint.
Mrs M had a mortgage from her bank and, because she was easily able to afford it, she had for many years been making a significantly larger repayment each month than the scheduled amount she was contracted to pay.
When she was in a branch of the bank one day, withdrawing some cash, it occurred to her to ask how far ahead she was with her mortgage. She was told she was "about ten years ahead with payments".
Mrs M decided to stop making any mortgage repayments for a while. She reasoned that the bank would be able to take her monthly repayments from the accumulated overpayments she had been making over the years. When this "fund" started to run out - the bank would presumably let her know and she would then start making repayments again.
Mrs M assumed that, until she resumed the repayments, her mortgage balance would effectively stay level - to reflect that fact that she had "stored up" so many payments in advance. She did not mention her plan to the bank.
A few weeks after deciding to stop her monthly payments, Mrs M received her annual mortgage statement. She had no further contact from the bank about her mortgage until she received the next annual statement. She was concerned to discover from the statement that her mortgage balance had increased. She could not understand this and thought the bank must have made a mistake.
When she contacted the bank to ask what had happened, it sent her some calculations which made no sense to her. She asked for an explanation and the bank wrote to her again. However, it still failed to explain why her balance had increased. Mrs M contacted the bank yet again. This time she was simply told that the situation could have been avoided if she had asked for a formal "payment holiday" to be set up on her account.
Frustrated by the bank's apparent inability to explain matters, Mrs M then made a formal complaint. She said that the bank should have taken more trouble to offer her advice about her mortgage overpayment - and she believed there would have been no increase in her balance if it had done this.
complaint upheld in part
Mrs M had not asked the bank how best to manage the overpayment on her mortgage account. And she had not sought its advice before deciding to stop her payments. In the circumstances, we did not consider the bank was under any obligation to offer her advice on its own initiative.
She had made certain assumptions about what would happen to her mortgage if she stopped making payments. Unfortunately, she had never checked with the bank that her assumptions were correct. So we did not think the bank could fairly be responsible for the fact that things did not go as she had expected.
However, we agreed with Mrs M that the bank had not dealt adequately with her queries. It had failed to give her a clear explanation about the increase in the mortgage balance - and its reference to a "payment holiday"' had not helped her understanding of the situation.
We explained to Mrs M that although the extra payments she made could be used to meet future payments as they fell due, this did not stop interest being charged on the balance of the account in the normal way. So the mortgage balance increased over time even though she was always ahead with repayments. A formal payment holiday arrangement would not have made any difference.
We said the bank should pay Mrs T £100 to reflect the inconvenience it had caused her by its failure to explain matters properly.