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Rise in second charge mortgage affordability complaints

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The number of people submitting successful complaints after taking on a second charge mortgage they couldn’t afford shot up last year, official figures show.

The Financial Ombudsman Service said it had “seen more examples of vulnerability, debt and consumers falling behind on payments for a product they could never have afforded” and that some second charge mortgages were carrying interest rates up to 35%.

Some 42% of complaints about second charge repayment mortgages were upheld by the Ombudsman last year, up from 31% of cases which were found in the customer’s favour in 2020/21.

Complaints about all second charge mortgages relating specifically to affordability and financial difficulty saw an 8% rise over the same period, said the Ombudsman, with 229 borrowers complaining last year compared to 213 complaints made during the financial year 2020/21.

Second charge mortgages are secured against your home in the same way first mortgages are, but they are often provided by a different lender from borrowers’ main mortgage provider and they typically charge a higher interest rate.

They’re useful if borrowers want to free up some extra money from their home but either don’t want to or can’t remortgage their existing loan and secure a further advance – for example because they’re still in their fixed rate deal and subject to early repayment charges.

When applying for a second mortgage, borrowers still have to be able to show they can afford repayments on the new loan and their existing mortgage.

A spokeswoman for the Ombudsman said: “Consumers who take out second charge loans may do so out of desperation, as they have other debts they’re struggling to repay and bringing it all into the second charge loan with a lower monthly payment might seem like a good idea at the time.

“But, concerns arise about the original advice and/or lending decision, when it’s evident the loan over the long term isn’t sustainable. Often the debts which have been consolidated were unsecured, but now they’re secured on their home it presents a real risk of them losing it.

“We’ve been able to help in several cases, where tens of thousands of pounds worth of loans have been written off, or where the lender has provided much more tailored forbearance, which has had a positive impact for consumers.”

‘Loan unaffordable from the start’

In one case handled by the Ombudsman, a couple – Steve and Laura – took out a £10,000 loan, secured by a charge on their property, to clear some unsecured debts, mortgage arrears and to fund some home repairs. The lender approved the loan with an interest rate of 35%.

After a short time, Steve and Laura struggled to make repayments. In retrospect, they felt the loan had been unaffordable from the start and proper checks had not been carried out by the lender. They said the lender hadn’t got a valuation of their property or checked their outgoings before lending.

Steve also felt the lender should have been alerted to a problem by their poor credit score, existing debts, and past and current arrears. Steve said there were also gambling payments on his bank statements and that should have indicated a gambling addiction.

The lender said it did not feel it had lent irresponsibly, so Steve and Laura approached the Ombudsman which found that the lender checks were not sufficient in verifying the couple’s expenditure.

It said the lender failed to ask for missing and incomplete statements. Had it done so, it would have seen evidence of high volume expenditure on gambling and it had also not asked for credit reports which would have shown their pattern of borrowing was unsustainable.

They already had £26,000 in unsecured loans and the £10,00 secured loan would add to this difficulty, shown by them falling quickly into arrears.

The Ombudsman said: “While the lender took what Steve and Laura said in good faith, we would expect a high level of scrutiny where a loan will be secured on a customer’s home. This is especially important where there’s debt consolidation and signs of wider financial difficulties, as was the case here.”

To settle the complaint, the lender was told to remove all interest and charges that had previously been applied to the loan, and to not apply any interest going forward. All repayments already made should be treated as reducing the capital amount. Further, all negative information relating to this loan was to be removed from their credit file.

Support for vulnerable customers

Last week the regulator, the Financial Conduct Authority wrote to more than 3,500 lenders to remind them of the standards they should meet as people across the country struggle with the rising cost of living.

“With household bills expected to continue to rise into the autumn, it is important that firms act now to make sure borrowers struggling with payments and customers in vulnerable circumstances can access the help they need,” the regulator wrote.

The FCA said it is also “concerned” that some customers in vulnerable circumstances are not getting the support they need.

It said: “Some lenders are not discussing the potential benefits of money guidance or free debt advice or helping and supporting borrowers to access these.

“These concerns were seen broadly across the sector. More serious failings were found at more than 30 firms, largely in the consumer credit sector. The FCA expects these firms to make improvements in how customers are treated.”

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Many consumers are feeling the impact of the rising cost of living in their personal finances and we expect this to increase over the next few months.

“Early action is important for those struggling with debt. We need all firms to get the basics right and provide good quality support. Where we see more serious wrongdoing, we are already acting to ensure these firms improve.”

The Ombudsman said: “We continue to work closely with the FCA to ensure a coordinated approach to addressing complaints about lending. We also provide a range of resources to help lenders do this, including information about our approach to resolving cases, and a database of ombudsmen’s decisions.”

The latest figures from the Finance and Leasing Association showed a 54% annual rise in the value of new second charge mortgage lending to £127m in April. The number of new agreements came to 2,802, which was 48 per cent higher than the same month last year.