Claims management companies are starting to take a look at interest only mortgage offers out of fear that compensation payments are going to lead them into miss-selling scandals in the future. As the government continues to put tougher regulation around these types of mortgages, lenders are more afraid to offer them so that they cannot be sued down the line.
Compensation payments do not make a borrower actually pay on the capital every month, but instead only force them to pay on their interest. Therefore, at the end of the term a customer will not have actually paid any off the principal and can find themselves unable to pay off the full terms of the loans. Many customers claim that they were miss-sold these loans and regulations were put in place by the Financial Services Authority to prevent this situation from arising in the future.
The new rules are expected to be announced in full by the FSA later in the week, but it is expected that one rule will at least require all lenders to check on their lenders at least once during the mortgage period to make sure that their customer is still comfortable with repaying the loan. On the other hand, building societies and banks fear that this will offer false assurance to borrowers that do not properly set up their repayment schedules.
The banks are instead worried that claims management companies will start to blame lenders then for any problems that borrowers have repaying their loans and will start to submit compensation claims left and right whether the bank is at fault or the customer is at fault. This could cost the banks millions of pounds as they continue to rectify the fallout from the previous miss-sold payment protection insurance scandal.