UK Edition
Homeowners who fixed their mortgage deal for two years when interest rates hit their lowest point in history are now pursuing legal action over their brokers' advice in what some claims firms say could be “the next big mis-selling scandal”.
Borrowers coming to an end of their two-year deal will be squeezed by significantly higher borrowing costs – and some are arguing they should have been advised to take out longer deals.
Interest rates fell to historically low levels in 2021 as a handful of banks launched sub-1pc deals and the average two-year fix dropped to roughly 2pc.
Now, almost two years later, hundreds of thousands of borrowers will feel the pinch as they brace for their monthly repayments to double or even triple. Those who took out sub-1pc rates face the worst fate, with their interest payments likely to quadruple.
Customer complaints consultancy Jencap Partners has reported an increase in enquiries from mortgage brokers whose clients have queried why they were recommended two-year fixes instead of longer fixed-rate deals.
Unlike other types of financial adviser, brokers are allowed to earn commission, paid for by the lenders who sell the mortgages. Brokers get paid a fee for every loan they help lenders write. On an average residential mortgage of £250,000, a typical fee equates to £1,000 – 0.40pc of the total loan. This commission is paid by the bank or building society.
But because two-year fixed-rate deals come around for renewal over twice as often as five-year fixes, brokers essentially get double the money for recommending shorter fixes.
Two-year fixes were 0.3 percentage points cheaper than five-year fixes on average in November 2021, according to analyst Moneyfacts.
Lewis Shaw, of advice firm Riverside Mortgages, said the small cost savings was not worth the extra risk of shorter-term deals and that brokers were wrong to have recommended them.
“I turned people away who wanted two-year fixes. We all know that ultra-low interest rates won't last forever.”
Mr Shaw claimed the main motivation for some of his peers to sell two-year fixes at the time would have been the fees. “They knew they’d get another fee in two years’ time. That’s why so many people took them out.”
Tim Jenkins, a director at Jencap Partners, said borrowers were now requesting personal information held by their broker under GDPR regulations.
When a mortgage broker takes on a new client, they conduct a “fact finding exercise” to understand their requirements.
Mr Jenkins said clients typically request to see these documents as part of a negligent advice claim to see what was recorded about them at the time.
Firms have up to eight weeks to provide the data, after which clients can file a claim with the Financial Ombudsman Service.
Jenkins said: “If the ombudsman adjudicates in favour of any of these borrowers, this could be the next big mis-selling scandal. We’re talking about a huge pool of consumers.”
In 2021, over half a million borrowers took out two-year deals, according to UK Finance, the banking trade body.
While he has seen a relatively small number of cases so far, Mr Jenkins said this number will “inevitably increase”.
How to make a claim – and the chances of success
There is a widely held belief among brokers that no claims of this type will be upheld by the ombudsman.
This is because the paperwork brokers have to put together for each client will almost always include a five-year option presented alongside the two-year deal.
Even if the broker heavily sold the two-year deal on the phone and in meetings, the level of evidence complaining customers have to overcome is automatically higher.
Michael Young, a legal director at professional negligence specialist Lime Solicitors, said: “It’s an extra hurdle, certainly.
“It can easily become a ‘he said, she said’ scenario. You’re always starting from a tougher position as a consumer versus the banks and brokers with these types of claims. It is stacked against the consumer.”
For this reason, Mr Young’s firm – like many others – takes a cautious approach to mortgage negligence claims.
He said: “There has to be advice so wrong that no other professional would have given it.
“You’d be looking at the original papers and asking: Was the client talked through the options? Were their particular circumstances talked through to show why the product was chosen?
“And you have to remember, advice stands if it was reasonable at the time.”
Mr Young said it boils down to whether a borrower went into the mortgage aware of their options. He added: “Covering up other options to get a higher commission would leave a broker in more trouble.”
A spokesman for the ombudsman told The Telegraph someone who took out a two-year deal in 2021 could now complain and allege that they received bad advice on the back of changing interest rates.
The ombudsman said it would consider both on what the consumer’s needs and circumstances were at the time, and also on the actual advice given.
“Possible movements in interest rates are only one factor when considering whether a particular product is suitable,” it said.
If a broker was to be ruled against by the ombudsman, the borrower would be entitled to compensation which a broker would pay drawing on their professional indemnity insurance.
A consumer can win up to £415,000 from a firm if they file their complaint to the ombudsman from April 2023 onwards, as long as the complaint relates to an event after April 2019.
Five-year fixes ‘the obvious choice”
Shaw is not the only broker of the belief that five-year fixes were the obvious choice for the majority of his clients during a period which saw banks charge record low interest rates.
Samuel Gee, director of Manning Gee Investments Limited, said: “It's important to consider why a broker would suggest a two-year deal during a period of historically ultra-low interest rates.
“A five-year deal would have been a more suitable option for a borrower with no plans to move or pay off their mortgage within that time frame. The majority of the deals I have arranged over the past few years have been with five-year fixed rates.”
Other brokers have been quick to label professional negligence claim firms helping borrowers as “ambulance chasers”.
Gary Boakes, director of Verve Financial, said: “Our culture has clearly changed and it is worrying. If this is allowed then it will just open the floodgates every time someone is not happy with their new rate.”
Mr Boakes argued that this would increase the legal paperwork for brokers and ultimately their fees. “It will have a drastic knock-on effect.”
Have your mortgage payments doubled, trebled or more? We want to hear from you: email ruby.hinchliffe@telegraph.co.uk