FSA warns lenders over interest only remortgage contracts

The Financial Services Authority has been considering the wording used in interest only remortgage contracts that allows lenders to switch borrowers from interest only to repayment remortgages.

A warning has been issued over the wording as the FSA believes that some ‘switching terms’ used in lenders standard consumer contracts, are at risk of being considered unfair and not in plain intelligible language. This will be the case where there is a failure to define key phrases which specify when the right to switch exists, and when terms are not clear about when a lender has a right to switch a interest only borrower onto a repayment deal.

The FSA has said that under the Unfair Terms in Consumer Contracts Regulations 1999, if a court deems a term to be unfair, the term would not be binding on the consumer. This may result in lenders being unable to switch the borrower from an interest only remortgage to a repayment remortgage. It added that if a court also deemed a term was not written in plain and intelligible language, then under the regulations the court could interpret it in favour of the borrower.

The FSA has said that a switching term is likely to be unfair if it gives the lender too broad a discretion to determine when the switching term will apply. It has issued a warning to lenders that only a court can ultimately determine whether a term is unfair or not and has advised firms to make sure their interest only remortgage contract terms are as fair as possible.