How does FSCS mortgage protection work?
While many people know that there is a compensation scheme for savings should a bank or building society fail, not so many know that there is cover for mortgages.
You may wonder how that works, as a mortgage is a loan to a borrower, so you might think if the provider fails, there is nothing to compensate anyone for.
However, if you lose money as a result of being advised to take a mortgage that is unsuitable for you, then you could be eligible for compensation.
This would apply to advice for any type of mortgage, whether that’s residential, or buy to let, if it is from a regulated advice firm.
Does the FSCS ever have to pay out for mortgage claims?
Yes. In fact, the FSCS has experienced a rise in the number of claims for mortgage compensation in recent years. The Scheme has paid out nearly £18mn compensation in the last 12 months to home finance claimants.
One firm, Fuel Investments, is responsible for a large proportion of these claims, most of which relate to advice to remortgage residential properties to raise funds to invest in high risk property schemes.
What type of mortgage advice is covered by FSCS?
Other situations in which someone might be eligible for compensation after losing money include when someone has not been advised about different types of mortgage available, if the specific details of a mortgage are incorrect, if someone was advised to switch mortgages but not given an adequate explanation of why the switch was being made, or if someone was advised to take out a lifetime mortgage that was unsuitable. You can find out more from FSCS’s here.
What was the 'Emptage Case' that FSCS paid out?
Ms Emptage took out an interest-only remortgage of £110,000 on her home with no “way of paying it off” in order to purchase a property in Spain in the expectation that in due course it would provide sufficient capital to pay off the loan. Unfortunately, the Spanish property market collapsed and by 2009 her investment had become nearly worthless. As a result, Ms Emptage had a debt which she had no means of repaying other than through the sale of their UK home. Since the adviser firm entered default and had no professional indemnity cover available, Ms Emptage claimed through the FSCS and was initially awarded £12,000 to compensate her for the advice to take out the interest-only mortgage.
Following a judicial review, in which the court found that FSCS should return Ms Emptage “to the position she would have been in had she not received bad advice”, she should also be compensated for the capital loss on the Spanish property.
FSCS treats other similar cases in the same way – compensating for the capital loss as well as the loss from higher mortgage payments.
Despite this judgment, FSCS does not cover any advice by a regulated intermediary to invest in an unregulated product.
It can only compensate where a loss arose from a risk to which an investor was exposed as a direct result of regulated advice: in Ms Emptage’s case, to take on a mortgage that would be unaffordable if the Spanish property speculation failed – as it did.
What type of mortgage advice is not covered by FSCS?
Mortgage endowments are considered investments rather than mortgage products, so compensation for these is handled differently. There’s more on investment advice here.
In summary are mortgages FSCS protected?
You are covered for mortgages if you have received inappropriate advice and have lost money as a result.