Unfair contracts may scupper lender moves to switch interest-only clients

The Financial Services Authority has warned lenders that they may not be able to switch interest-only customers to a repayment mortgage if the wording in their contracts is unfair.

Last week the regulator issued guidance to lenders after it found a number of switching terms in their contracts may be potentially considered unfair or not expressed in plain and intelligible language, under the Unfair Terms in Consumer Contracts Regulations 1999.

The regulator says if a court were to deem a term unfair or not written in plain language, it would not be binding on the consumer.

This might result in the lender being unable to switch the borrower from an interest-only mortgage to a repayment one.

The FSA says a switching term is likely to be unfair under the regulations if it gives the firm too broad a discretion to determine when the switching term will apply.

The wording in the contract must also be clear about when a lender intends to switch a consumer onto a repayment mortgage and key phrases in the contract must be defined. The regulator has warned that ultimately, only a court can determine whether or not a term is unfair.

A spokeswoman for the Council of Mortgage Lenders says it is not aware of any impending court cases that would challenge lenders’ contracts in these circumstances.

But she adds: “We are in contact with our members on this matter and will work with them on this and any new guidance that the FSA issues.”

The FSA released its latest figures on interest-only mortgages in its Mortgage Market Review paper in December.

It showed that such deals accounted for 30% of all mortgages in 2010 and that half of them had no repayment vehicle in place.