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