Financial Ombudsman rules credit checks should include income drop on retirement and sets zero mortgage interest rate for Glasgow couple

A retired Glasgow couple who faced the repossession of their home from an unaffordable secured loan have been successful in a complaint to the Financial Ombudsman Service. The couple had been advised to refinance and consolidate secured and unsecured loans with Black Horse Ltd over a longer period and at a APR of around 15% two years prior to retirement. The couple had substantial equity in their home but found that their income dropped significantly two years after taking out the loan in 2008 upon retirement. They approached Govan Law Centre when threatened with repossession in relation to their second charge secured loan.

GLC's Principal Solicitor, Mike Dailly, argued that the lender ought to have fairly considered the couple's income on retirement given that the affordability check under the Consumer Credit Act 1974 took place two years before retirement; and any reasonable creditor would have considered the affordability of the loan not just when the customer was in full employment aged 64; particularly so given that this was a loan secured on their home. The lender objected to this line of reasoning, but the Ombudsman agreed and held as follows:

"I think that it would have been reasonable for Black Horse to ask when Mr B was going to retire and what his income would have been ... If Black Horse had obtained details of Mr B's retirement income, (and taking into account Mrs B's income) I don't see how it could fairly have lent Mr and Mrs B the amount it did - the loan was always going to be unaffordable once Mr B retired".

The Ombudsman ruled that the lender should charge no further interest on the couple's secured loan and restructure it to enable it to be repaid at £200 per month.

GLC's Mike Dailly said: "This is a fantastic outcome for our clients, and means an unaffordable loan can now be repaid on an interest free basis, averting the threat of repossession proceedings and homelessness."

"We also think other consumers can use the reasoning underpinning this decision because there is a worrying practice across the UK of some lenders targeting 'equity rich, income poor' customers, whereby unaffordable loans are secured on the value in the consumers' homes."

"This ruling by the Financial Ombudsman Service makes it clear that UK lenders have to undertake proper affordability checks and lend responsibly, taking into consideration the customer's income now and if close to retirement, any drop in income at that time".

The final decision of the Financial Ombudsman is available here.

Financial Ombudsman rules credit checks should include income drop on retirement and sets zero mortgage interest rate for Glasgow couple