Unfair terms in a mortgage

Mortgage contracts, known as standard securities, could contain terms that are unfair and so cannot be enforced.

This content applies to Scotland

What are unfair terms?

A mortgage obtained on or after 1 July 1995 could contain potentially unfair terms. [1] A potentially unfair term is one that has not been individually negotiated between the lender and the borrower and which causes a significant imbalance in their rights and responsibilities, so that the borrower is adversely affected. [2]

A term in the mortgage is not individually negotiated if it has been drafted in advance by the lender without the input of the borrower. [3] The burden is on the lender to prove that potentially unfair terms have been individually negotiated. [4]

However, terms that must be included in the contract as a result of legislation cannot be unfair. [5] Nor are terms relating to the main subject of the agreement, [6] or the price set. [7]

In addition, all of the terms of a mortgage must be written in plain language. [8] If there is any uncertainty about what a particular term means, then the interpretation that is most favourable to the borrower will apply. [9]

Examples of unfair terms

The legislation lists a series of potentially unfair terms, although this is only an illustration and is not exhaustive. [10]

The Financial Services Authority has set out some guidance for mortgage lenders and others on what could constitute a potentially unfair term. [11]

Examples include terms that:

  • allow that lender to vary interest rates without indicating that this may happen, when it may happen and what impact this may have on the rate charged

  • charge different types of mortgage customer different interest rates, for example between those who are locked-in to a product for a specific period of time and those who are not

  • allow the lender to vary a term in such a way that it can never benefit the borrower.

Taking action about unfair terms

The borrower should make a complaint to the Financial Services Authority (FSA) since the FSA can make an application to the court for an interdict to prevent a term or terms being generally used in mortgages. [12] This can also be extended to other similar terms. [13]

However, the FSA is not empowered to pursue redress for individuals. Unless the lender is prepared to accept that a term is potentially unfair and remove or amend it, the borrower will need to take court action to have the term declared unfair.

A term in a mortgage that is found to be unfair is not binding on the borrower. [14] However, the rest of the mortgage will be binding if it is possible for it to continue without the unfair term. [15] 

Last updated: 29 December 2014

Footnotes

  • [1]

    reg. 2 The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [2]

    reg. 5(1) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [3]

    reg. 5(2) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [4]

    reg. 5(4) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [5]

    reg. 4(2) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [6]

    reg. 6(2)(a) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [7]

    reg. 6(2)(b) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [8]

    reg. 7(1) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [9]

    reg. 7(2) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [10]

    sch. 2 The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [11]

    Fairness of terms in consumer contracts - statement of good practice Financial Services Authority May 2005

  • [12]

    reg. 12(1) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [13]

    reg. 12(4) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [14]

    reg. 8(1) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083

  • [15]

    reg. 8(2) The Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083