- Interest rate cuts too late for over-stretched borrower
- FSA's December 4 statement confirms difficult times ahead for mortgage sector
Mortgage providers and brokers could be the target of claims from customers reaching the end of low rate introductory mortgage periods, warns City law firm Reynolds Porter Chamberlain LLP (RPC).
The tightening of lending criteria in the UK in reaction to the sub-prime crisis in the US and the wider credit crunch means homeowners who took out a mortgage before the crisis under more relaxed criteria will emerge from their low rate introductory period mortgage to a very different market.
At the end of discounted introductory periods borrowers often switch mortgage providers to avoid the 'payment shock' of their current lenders higher 'standard variable rate'. As more lenders shun the sub-prime market and lending becomes generally more restricted, the options available are reduced. Faced with even more unaffordable interest rates, many borrowers may resort to claims alleging mortgage mis-selling, warns RPC.
To compound the sub-prime problem, the typical introductory term of two years means periods ending now also span a series of interest rate rises from the Bank of England MPC. The cost of borrowing has shot up from 3.75% in January 2004 to 5.5% currently, just as borrowers are finding it harder to remortgage.
The Financial Services Authority (FSA) statement on December 4 warned that 1.4 million borrowers will emerge from their short-term, fixed-rate periods next year, highlighting the scale of the problem. The Citizens Advice Bureau has today issued strong criticism of selling practices in the sub-prime sector.
Robbie Constance, Solicitor, at RPC says: "Defaults always lead to blame - it's human nature. Unfortunately, the finger of blame is likely to be pointed firmly at brokers and lenders, alleging that they recommended unsuitable and unaffordable mortgages."
RPC are concerned that it is now easier for borrowers to bring claims than it was following the housing market crash of the early 1990's. Previously, claims could only be made in the courts but today borrowers can turn to the Financial Ombudsman Service (FOS) at no cost to themselves. The FOS has confirmed that it is currently budgeting for a significant influx of such complaints in its coming financial year.
Says Robbie Constance: "The Ombudsman decides what, in his opinion, is fair and reasonable in the circumstances of the complaint. This is a broad jurisdiction, not restricted to the legal principles of the courts, so it is an uncertain terrain for lenders and brokers facing claims."
Mortgage providers are already under fire from a crackdown by the FSA for making unsuitable recommendations and conducting sub-standard credit checks. RPC warns it may well be the borrowers who 'crack down' on lenders next.
Robbie Constance says: "Where the FSA goes, claims tend to follow. Repossessions are on the rise so there will be many disgruntled borrowers looking to recoup their losses and claims management firms eager to help them."
Not just a sub-prime problem
While UK sub-prime mortgage borrowers are the most likely candidates to find themselves struggling, other borrowers are also at risk.
Those with interest only mortgages are likely to struggle to pay off the capital borrowed in a falling market. Homeowners with self-certification mortgages are also likely to find that interest rates are too high when they change mortgages. Exaggerated incomes will not be enough when the reality of far higher rates bites.
Says Robbie Constance: "Lenders factor in the additional risk of lending to those with poor credit ratings and the self-certified, so rates and charges are higher. Our concern is that a modest reduction in interest rates over the coming months will not be enough to avert personal financial crisis for those with mortgages they could not really afford in the first place."
If prices fall
With house prices now falling in most parts of the UK, the possibility of negative equity becomes a very real prospect, warns RPC, and both lenders and borrowers could lose out.
Robbie Constance says: "Those with high loan-to-value ratios will find they owe more than their property is worth. Bringing a claim for being sold an unsuitable mortgage could be seen as a way to make up any losses. The lenders themselves will lose out too through shortfalls from the sale on, not to mention the cost of, repossession."