Lenders warned over unfair terms in interest-only contracts

The Financial Services Authority (FSA) has published guidelines to push lenders to simplify wording on mortgage contracts that permit switching consumers from interest-only to repayment mortgages.

The regulator said it believes some switching terms in standard consumer contracts risk being considered unfair, or of not being expressed in plain and intelligible English, under the Unfair Terms and Consumer Contracts Regulations 1999.

In the FSA's view, a switching term is likely to be unfair under the regulations if it gives the firm too broad a discretion to determine when the switching term will apply.

Under the regulations, a term is unfair if it causes a significant imbalance in the rights and obligations of the parties to a consumer's detriment, contrary to the requirement of good faith.

The FSA added that, if a court deemed a switching term to be unfair under the regulations, the term would not be binding on the consumer. The regulator said this might result in the firm being unable to switch the consumer from an interest-only to a repayment mortgage.

"Lenders should have a good look at the guidelines, read them through and make sure that their contract terms on switching are broadly compliant with what we're saying," the FSA said.

"[This] is just guidance, not a rule. We're just trying to point lenders in the right direction."

Its guidelines, finalised yesterday, are not connected to the Mortgage Market Review and aim to help lenders avoid future litigation.