Interest-Only Mortgage Compensation Claims Explained

Laura Broad[1]

Laura Broad

Money Savings Advice Interest only mortgage compensation claim

If you’ve taken out a mortgage, you should know there are a couple of different types - the main two being repayment mortgages and interest-only mortgages. Interest-only mortgages have become far less popular in recent years - so much so that the number of interest-only mortgages halved between 2012 and 2018.

What Is Interest-Only Mortgage Mis-Selling?

The Financial Conduct Authority has ruled that many interest-only mortgages have been mis-sold as they were not explained fully to customers. Victims may be able to claim compensation through the FSCS.

But with the appeal of low monthly repayments strong, they are still the mortgage of choice for many people going down the buy-to-let route. Without a specific reason like this, however, most people would be better off with a repayment mortgage.

Unfortunately, the Financial Conduct Authority has found that this has not always been explained properly to borrowers by the people selling them their mortgage.

Read on to learn more about interest-only mortgages, how they are commonly mis-sold and how to make a claim for compensation if you think you’ve been given bad advice.

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What Is an Interest-Only Mortgage?

With a repayment mortgage, each month you make a repayment that covers both the interest your balance has accrued and a chunk of the lump sum you initially borrowed.

It’s different with interest-only mortgages. With these, you only pay off the interest each month and leave the balance that you borrowed untouched. This lump sum then needs to be paid off in full at the end of the mortgage term.

Who Is an Interest-Only Mortgage Right For?

There are both advantages and risks to interest-only mortgages that you should’ve been made aware of before you borrowed any money.

Lower monthly repayments are appealing, but they do come at a cost. You need to have a reliable plan in place to meet your monthly repayments and save for the lump sum you will owe at the end. This repayment amount at the end will also be significantly higher than if you’d gone for a repayment mortgage.

If you’ve got a lot of money in the bank or in investments which you can quickly access then these repayments are not likely to be an issue. If you’re buying the property as a buy-to-let and intend to collect rental payments, the capital owed at the end is also less likely to be a problem than it would be if it was home you were buying to live in yourself.

If you don’t meet either of these criteria - a high earner or a landlord - then it’s unlikely an interest-only mortgage is right for you. These mortgages are very risky if you are planning to rely on selling the house to pay off the debt at the end. If house prices fall in value or there is an economic downturn, you may end up having to sell it for less than you borrowed.

Mis-Sold Interest-Only Mortgages

Given the risks involved with interest-only mortgages and the small proportion of people who they would suit, the FCA sets out guidelines that lenders, brokers and advisors must follow.

If any of these are broken and the company doesn’t meet their obligations, it could leave you financially worse off or in distress. This would count as mortgage mis-selling.

How Do You Know if You Have an Interest-Only Mortgage Claim?

There are certain signs that show you may have been mis-sold an interest-only mortgage and that you may have a case to make a claim.

Ask yourself these questions:

  • Did your lender specifically tell you that you were only paying off the interest?
  • Was it made clear to you that you would need to repay the lump sum in full when the mortgage came to an end?
  • Were all the risks involved with interest-only mortgages explained clearly to you?
  • Were comparisons of monthly repayments between repayment and interest-only mortgages shown to you?
  • Were you asked how you planned to repay the money you owed and save up to pay off the lump sum at the end?

If the answer to any of these is no, it’s possible you were given bad financial advice. This could put you at risk of financial harm, so you may have a claim on your hands.

Making an Interest-Only Mortgage Claim

If you feel you’re owed compensation for a mis-sold interest-only mortgage, you need to make a complaint. There are a few steps involved in the claims process. You can do it yourself or ask a solicitor to handle it for you depending on how involved you want to be.

Step 1: Gather All the Information You Have

You first need to work out who was in the wrong and who you want to complain to, or about.

  • Used a mortgage lender directly (e.g. bank or building society) - it’s on them.
  • Used a mortgage broker - it’s on them, they were responsible for making sure you got a suitable loan regardless of who was doing the actual lending of money.

This might be hard to remember if it’s been years since you took the mortgage out, so dig out all the paperwork you have related to the mortgage process. This includes all communications with them, any evidence they gave you financial advice or any document that outlines the risks of an interest-only mortgage and why that’s not right for you.

Step 2: Complain to the Company Directly

The next step is to write a letter of complaint to them directly. There are letter templates available online as a starting point. Essentially, you need to tell the company who you are, why you’re complaining and give them 14 days notice to get back to you.

Step 3: Involve the Financial Ombudsman or the FSCS

If you’re unhappy with the response you got back or, you didn’t hear back at all, you can escalate your complaint to the Financial Ombudsman Service. You can do this online or find their contact details on their website. They will investigate your case for you and, if they deem you were mis-sold to, ask the company to pay compensation for any losses.

If the company you were mis-sold your mortgage by is no longer trading, you may still be able to claim some compensation from the Financial Services Compensation Scheme. There are limits to how much the FSCS pays out, so depending on how much you borrowed, you may not be able to get all of your money back.

How Can Money Savings Advice Help You With Making an Interest Only Mortgage Compensation Claim?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for mis-sold financial products and they can do the same for you.

Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.

Money Savings Advice Author Laura Broad

Laura Broad

Laura is a professional content writer and learning designer, passionate about empowering people through straightforward, jargon-free content. When she's not reading or writing about all things personal finance, you can find her in the gym, barbell in hand.

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