Pensions Mortgages

Pensions Mortgages

A pension mortgage is an interest-only mortgage that has an additional investment plan called a personal pension. They were mainly sold in the 1980s and 1990s when they were described and advertised as a convenient and cheap way of paying a mortgage.

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However, they were not cheap and convenient despite many customers being advised to switch out from their existing repayment mortgage to the more attractive pension mortgage. This was because the pension mortgage offered interest-only monthly payments that were cheaper — combining home ownership with pension planning together as one product was a massive risk which consumers have only found out to their detriment years later.

Because the mortgage loan was being repaid through one-quarter of the pension pot the fund needed to increase four times the amount of the mortgage. This, as well as the poor investment returns since the 1980s, had left many pensions mortgages worth a lot less than people initially thought they would be when they opted into them. Once at retirement age, many people were not left with enough money, or the amount they expected, to pay off their mortgage.

Pension mortgages are not just solely down to the fact that they did not grow as much as the customer expected as poor advice was also given in the first place. Many people were mis-sold mortgages if the mortgage adviser did not inform you about the product they were selling adequately enough. You could have also been mis-sold a mortgage if the financial adviser did not take into account your circumstances stances both in the short term and in the long run.

Have I been mis-sold a pension mortgage?
If any of the following statements apply to you, then you were likely subject to mortgage mis-selling:

  • You were not told about other options or informed of the risk
  • If your mortgage broker did not give you the opportunity to compare your pensions mortgages to different types of mortgage that could have been a better financial option for you, then you have been mis-sold a mortgage. Similarly, if the mortgage adviser did not inform you that a pension mortgage carries a risk of the shortfall at retirement age when you will struggle to afford it, then you have been mis-sold a mortgage.
  • You were not told what would happen if things went wrong
  • If the mortgage adviser did not mention that you would have to plan for living on a reduced income from your pension because of the shortfall at retirement age, then you have been mis-sold your pension mortgage. Many mortgage brokers fail to inform their customers that a deficit at retirement means that you will have to find other ways to repay the balance of your pension mortgage.
  • You never discussed your attitude to risk

It is essential for your mortgage broker to analyse in depth whether you were prepared to run the risk of not being able to repay your mortgage in the future and willing to have fewer pension contributions. If they failed to do this, then this is another example of mortgage mis-selling.

Mis-sold mortgage compensation amounts
If you have been mis-sold a pension mortgage, then your case is likely to be quite complex and time-consuming because of the nature of pension mortgages.

Because of the tax reliefs which are associated with pensions, some people see paying into a pension as a good way of building up a sum of money which can then be used to pay off an interest-only property loan. However, there are risks with this because the amount of money which you will receive at the end of your policy term rely on stock market performance. With this, there is also no guarantee that you will have enough to pay off the capital on your mortgage. This is because the more of your pension fund that goes towards paying for your property then, the less you money you will have to during your retirement.

It is the very nature of pension mortgages; therefore that make determining mis-sold mortgage compensation amounts a complex issue. It is only the cash part of pension mortgages that would have been intended for the repayment of the mortgage, and you are usually unable to surrender the pensions themselves.

This means that only cancelling an entire mortgage policy and getting a full refund on the premiums paid plus interest would occur in only the rarest circumstances. There will be variations on this, and the mis-sold mortgage compensation amounts will vary on a case by case level.

Calculating the costs
When companies calculate the mis-sold mortgage compensation amounts, they must adhere to the guidance provided by the Financial Services Authority (FSA) and the Financial Ombudsman Service. Mortgage advice has also been regulated by the Financial Conduct Authority since 2004.

What the FSA and the Financial Ombudsman Service do to regulate compensation amounts is generally compare the current financial position of the customer with the position they would have been in if they were advised to take out a repayment mortgage instead of a pensions mortgage, or any other mortgage for that matter.

The Financial Ombudsman Service has overseen many disputes where the firm has been unable to work out the right amount of compensation because of the complex circumstances surrounding the case, which typically occurs with mis-sold pension mortgages. In some cases, customers have already switched to a repayment mortgage completely or chosen to switch but kept their endowment policy.

You have already surrendered the policy
If you have already converted to a repayment mortgage form your pension mortgage, then your compensation should be calculated by comparing the repayment mortgage with the endowment policy. This should be compared up to the date when the mortgage was converted to a repayment mortgage, then using the surrender value of the endowment policy at the date from when it was switched and adding interest on top of that. Again, the interest should be added from the date that the mortgage policy was switched to the date when the firm first starts paying compensation.

You have retained the endowment policy
If you have converted to a repayment mortgage already but have maintained the endowment policy from the pension mortgage, then this can cause uncertainty with some firms as to the compensation amounts. They would typically need to find out the precise reason why you chose to keep the endowment policy going and pay the premiums but decided to switch to a repayment mortgage.

You had a break between two different mortgages
There are some instances where people have been between mortgages for a period time, for example moving from a pension mortgage to a repayment mortgage. If people in this position had initially been had a repayment mortgage, then they would have been able to sell their property and repay it off.

That would mean that they would have no mortgages outgoings until the time when they bought a new property.

However, some customers were mis-sold an endowment policy, and that was kept going after they sold their property even though they did not buy another property straight away. This was because the endowment policy was sold under the pretence that it was a flexible way of paying off future mortgages. They intended to use this policy as a way of paying the mortgage at the time when they eventually bought a new or another property.

The calculation of the firm should take into account all the premiums period when compensation costs are due in cases like this. The firm should also include the cost of the premiums when the policy was not being used for a mortgage because the customer kept the policy in the first place for the initial purpose of repaying their mortgage.

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