Around 750,000 customers with mortgage payment shortfalls have overpaid when trying to clear their arrears, according to the financial watchdog – with those affected due to be reimbursed hundreds of pounds.
The Financial Conduct Authority (FCA) has identified that some mortgage companies have included customers' arrears balances when re-calculating payments over the remainder of their mortgage term, while also pursuing those same customers through debt collection processes – essentially charging them twice for the same arrears.
The FCA says that its analysis has indicated that the financial impact for most customers "may have been relatively small", with estimated redress likely to be in the low hundreds of pounds.
While customers who have been able to meet re-calculated mortgage payments that include arrears balances will be able to clear their mortgages more quickly, the FCA has nevertheless identified a number of concerns about the re-calculations.
As well as potentially breaching FCA guidelines, there are additional concerns that those who have been previously struggling to meet payments and clear separate arrears will not be able to afford the new combined expense and will therefore fall further into debt.
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The news comes only months after the FCA admitted that mortgage lenders were not doing enough to make sure homeowners don't become 'mortgage prisoners', after it emerged that many borrowers are being told they can't afford to remortgage on a cheaper deal – with some then finding themselves stuck on higher standard variable rates.
Rules introduced in April 2014 mean that anyone getting a mortgage, or who already has a mortgage, should have their incomings and outgoings scrutinized to check they can afford the product not just at the current rate of interest – but at rates of 6% or 7%.
The FCA is currently consulting on how customers with mortgage arrears should be treated.
What do the FCA's guidelines say about adding arrears to future mortgage payments?
According to the FCA, the re-calculation of payments to include arrears (a practice known as 'capitalisation') should not be done without the customer's prior consent and individual financial situations should be taken into consideration before this agreement is reached.
What happens next?
Affected customers do not have to take action at this stage, as mortgage companies will contact them directly.
Essentially, the new monthly mortgage repayment calculations should not have taken the arrears into consideration. In order to rectify this, mortgage companies should calculate how much the customer has overpaid and then off-set this against the remainder of the mortgage term.
If the higher rates have meant that customers were unable to meet their arrears payments, or have paid additional fees, this should also be redressed. The FCA will examine how best to do this.
In addition, the mortgage companies will also be responsible for contacting credit reference agencies to make sure that the issue does not harm customers' credit ratings.
What does the FCA say?
Jonathan Davidson, director of supervision, retail and authorisations at the FCA, says: "Even if inadvertent, automatic capitalisations of arrears can lead to poor customer outcomes and firms need to put this right and make sure the practice stops."