How to avoid a shortfall on your mortgage

If your mortgage lender makes a mistake and charges you too little for your monthly repayments, be aware that even though the error is not your fault you will still have to pay the outstanding balance back.

Known in the industry as ‘mortgage underfunding’, this issue can cause a great deal of financial distress for customers affected – most of whom will not have budgeted for a sudden increase in their payments.

Complaints about mortgage underfunding

The Financial Ombudsman Service (FOS) said at the end of last month that it has received an increasing number of calls from consumers complaining about mortgage underfunding.

Although a long standing issue for the FOS, mortgage underfunding has come into the spotlight this summer after 18,000 Yorkshire and Clydesdale Bank customers were left with a serious shortfall on their mortgage due to a ‘calculation error’ by the bank.

The FOS said many people have since contacted them questioning the way in which disputes about mortgage underfunding are dealt with.

According to the FOS, the ‘capital shortfall’ - the outstanding money owed - will only be written off if the lender is ‘entirely to blame’ for the mistake.

Mortgage lenders can make monthly repayments too low for many reasons, the FOS said, such as quoting an interest-only payment by mistake, calculating payments over a longer term than planned or even through a simple typing error.

What the ombudsman must decide is if the customer ‘should’ have known they were not paying enough. They will do this by looking at the information provided by the lender, such as annual statements, as well as taking into account the individual’s financial knowledge and whether the consumer had previously queried the payment.

It is for this reason that you must keep a close eye on any information you receive from your lender through the post and ensure the amount you are paying correlates with what you think you should be paying.

Check your annual statements carefully

David Hollingworth, a spokesperson for brokerage London & Country Mortgages, said: ‘I think that the main advice is that borrowers should keep an eye on the info that is sent through to them regards changes in payments and in particular the annual statement’.

‘Rather than simply filing the statement have a proper scan through and make sure that it reflects your understanding in terms of the repayment method, the term and the interest rate that has been applied’.