redress for mortgage underfunding

Usually:

• we will tell the lender to write off the capital shortfall that has built up to the date the mistake was sorted out;
• we will not deduct from the shortfall the notional past savings that the borrowers made as a result of having made lower payments.

Exceptionally, we will deduct notional past savings (without interest) from the capital shortfall:

• to the extent the lender can show that the past savings are still retained by the borrowers as identifiable and readily-realisable assets;
• unless the borrowers can show that it would be unreasonable to do so in the particular circumstances.

Where appropriate, we will also award compensation for past distress or inconvenience – but only so far as it exceeds any notional past savings we have disregarded. Usually, we will not award compensation for the future inconvenience of having to make increased payments.

Sometimes, unknown to the borrowers, the underfunding has lengthened the mortgage term. Occasionally, this is counterbalanced by capital payments the borrowers made (perhaps from an inheritance or a redundancy payment) with the intention of shortening the original mortgage term. We are likely to calculate compensation as if such capital payments had not been made.

The following examples are based on a case where:

• the loan was intended to be a £50,000 repayment mortgage over a 25-year term
• the monthly payments were actually of interest only, because of a mistake by the lender
• the mistake was discovered after 5 years, with 20 years of the term left
• at that stage, the mortgage debt was £4,000 higher than it should have been
• notional past savings were £3,500
• we consider that £250-worth of inconvenience was caused to the borrowers.

Ordinarily:

• we would not deduct any of the notional past savings from the capital shortfall
• we would require the lender to write off the whole capital shortfall of £4,000
• we would not award anything for inconvenience, because the disregarded notional past savings of £3,500 exceed the £250 we would otherwise have awarded.

Exceptionally, if the lender showed that £1,000 of the past savings formed an identifiable and readily-realisable part of the borrowers’ current assets:

• we would deduct £1,000 of the notional past savings from the capital shortfall
• we would require the lender to write off the remaining £3,000 of the capital shortfall
• we would not award anything for inconvenience, because the disregarded notional past savings of £2,500 exceed the £250 we would otherwise have awarded.

Exceptionally, if the lender showed that all the past savings formed an identifiable and readily-realisable part of the borrowers’ current assets:

• we would deduct all of the £3,500 notional past savings from the capital shortfall
• we would require the lender to write off the remaining £500 of the capital shortfall
• we would also award £250 for inconvenience.

Exceptionally, we will modify the approach where we consider it reasonable in the circumstances of the particular case. For example:

• Where the borrowers are near or beyond retirement and cannot afford the future payments, even if the whole shortfall to date is written off, we might award some compensation in respect of the future additional payments or require part of the loan to be interest-free.
• Where the borrowers would not have taken out the mortgage at all if told the correct repayment figure, we might compensate them on the basis of putting them in the position they would have been in if they had not been misled.
• If the borrowers ran up arrears by failing to pay all of the incorrect lower repayment, and so demonstrated that they would not have made the correct payment anyway, compensation is likely to be reduced accordingly.