Mr and Mrs T remortgaged their property in 2009 and a Legal & General mortgage adviser recommended a new home loan that meant they paid an early repayment charge of £1,635 and consolidated their debts.
When the L&G adviser reviewed the couple’s finances they noted “They are determined to achieve their objective of being debt free as quickly and affordably as possible using the budget they have given me of £733 and the prospect of having to keep making mortgage payments for another 19 years is unwelcome.”
The pair were paying one unsecured loan that had an interest rate of 6 per cent at £95 per month with 27 months to run and another unsecured loan with a similar interest rate costing £242.92 per month.
This had 51 months left to run.
Mr and Mrs T had a small balance on their credit cards, savings of £22,000, a comfortable excess of income over outgoings and no history of previous debt consolidation.
The advice from L&G was to increase the mortgage from £53,572 to just over £74,000 but to reduce the term to 12 years.
Gerard McManus, ombudsman, said this advice had the effect of increasing the term of the unsecured debt substantially.
He said: “I do not feel that extending the period of their indebtedness was appropriate advice to meet Mr and Mrs T’s objectives of being debt free as soon as possible.
“The appropriate advice would have been to simply deal with the secured debt and allow Mr and Mrs T to pay off the unsecured debt as they had been doing. I do not see any income constraints on Mr and Mrs T doing so with a surplus income of £1,000 per month.
On the second issue of whether it was appropriate to pay an ERC of £1,635 the broker said that the downside was pointed out to Mr and Mrs T.
The broker added there would only be a saving of £416 as the interest rate was lower – but that it recommended it “because you believe interest rates will rise before next year and you wanted to secure a short term fixed rate now”.
Mr McManus said: “It is more likely that this was the view of the adviser.”
Mr McManus said he believes Mr and Mrs T were encouraged to pay the ERC by their adviser’s incorrect views on interest rate movements.
He said: “Mr and Mrs T should have been advised to wait out the penalty period and therefore should not have had to pay the ERC. So it should be refunded together with interest.”
Legal & General have been told to work out the amount paid to date for the two consolidated loans in capital and interest payments and calculate how much remains on their mortgage balance for the consolidated debt.
The broker then must add together the first two amounts and take away how much would have been paid to clear the debt if it had not been consolidate and pay the result as a lump sum to the couple.
L&G was also ordered to refund the ERC together with the mortgage interest related to it.
The broker must also refund the portion of their fees and charges related to the consolidated debts and the ERC together with the relevant mortgage interest.
