Bank of Scotland plc · DRN-6058874

The complaint Mr and Mrs M’s complaint is about a Halifax-branded mortgage they held previously with Bank of Scotland plc (BOS). They repaid the mortgage in May 2023, following the sale of the mortgaged property. Mr and Mrs M arranged the sale in the knowledge they’d pay an early repayment charge (ERC), but also in the belief that the ERC would be refunded to them when they arranged a new mortgage on another property. That didn’t happen, because the property intended as the security for the successor mortgage – which Mr and Mrs M had bought the previous year – turned out to be partway through being extensively refurbished, making it un-mortgageable in that state. BOS apologised for not explaining the conditions of refunding ERCs in sufficient detail, and offered £500 compensation. Mr and Mrs M didn’t accept BOS’s offer and referred the complaint to us instead; they believe BOS should refund the ERC. What happened The above summary is in my own words. The basic background to this complaint is well known to both parties so I won’t repeat all the details here. Instead I’ll focus on giving the reasons for my decision. Our decisions are published, and it’s important that I don’t include any information that might result in Mr and Mrs M being identified. If I don’t mention something, it won’t be because I’ve ignored it. It’ll be because I didn’t think it was material to the outcome of the complaint. What I’ve decided – and why I’ll start with some general observations. We’re not the regulator of financial businesses, and we don’t “police” their internal processes or how they operate generally. That’s the job of the Financial Conduct Authority (FCA). We deal with individual disputes between businesses and their customers. In doing that, we work within the rules of the ombudsman service and the remit those rules give us. We don’t replicate the work of the courts. We’re impartial, and we don’t take either side’s instructions on how we investigate a complaint. We conduct our investigations and reach our conclusions without interference from anyone else. I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. The starting point here is that the ERC is not a penalty; it’s a term in the contract that Mr and Mrs M agreed to and accepted when they entered into the interest rate product; that was in 2018. As is common industry practice, BOS offers borrowers who find themselves having to pay an ERC the possibility of a refund in certain circumstances. The important thing to remember is that this provision is not a term of the contract; it’s a concession that BOS can choose to apply, at its discretion, if the qualifying criteria are met.

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I’ll come back to the qualifying criteria in a moment, but before that I need to explain that even where they have lent before, lenders are not obliged to lend again. That’s the case even where a lender has issued a decision-in-principle (DIP) which I believe is what Mr and Mrs M are referring to (mistakenly) as a ‘mortgage guarantee’. A DIP is not an offer, or promise to lend. It is only ever an indication of what a lender would be willing to consider lending in the event that a new application met its lending criteria. The mortgage Mr and Mrs M repaid was subject to an interest rate product period until 30 June 2023. They repaid the mortgage on 18 May 2023, so an ERC was rightly charged. What I now have to consider is firstly, whether there were realistic circumstances in which Mr and Mrs M would have been eligible for the ERC to be refunded. If I conclude there were any such circumstances, I will then have to consider whether that eligibility was denied Mr and Mrs M by something BOS did or failed to do. Here’s what needed to happen for Mr and Mrs M to be eligible for an ERC refund. Firstly, an application for a new mortgage secured on their intended property needed to be accepted by BOS, an offer issued and funds released for completion. That might have been possible if the property in question had been in a mortgageable condition – and therefore acceptable security – at the time an application was made. It’s matter of record that it was not. Secondly, the new mortgage would need to have completed within the relevant time frame. As a starting point, BOS imposes a three-month deadline on all requests for the concession. Taken in isolation, that would have given Mr and Mrs M until 18 August 2023 to complete the re-mortgage. In reality, the actual time-frame in Mr and Mrs M’s case was shorter than that. I’ll explain why that was. The whole premise on which an ERC refund concession is based is that the new mortgage be on the same interest rate product as the outgoing mortgage, with the residual term of the existing product carried over (‘ported’). Here, the existing interest rate product was due to expire on 30 June 2023. So, setting aside the standard concessionary period of three months, Mr and Mrs M would have had to be accepted for and completed their new mortgage before 30 June 2023, with the existing interest rate product then running for a matter of days before expiring. Mr and Mrs M only started the application in mid-September 2023, about two and a half months after the interest rate product had expired. In summary therefore, Mr and Mrs M could not have met BOS’s eligibility requirements for a concessionary refund of their ERC, firstly because the proposed security was in an un-mortgageable condition, and secondly because the time frame for them doing so ran out before an application was made to BOS. We asked Mr and Mrs M what they might have done differently if they’d understood all of this at the outset. They didn’t tell us they’d have delayed the sale and redemption until after 30 June 2023, which leads me to conclude that this most likely wasn’t a viable option for them. Nor did they tell us they’d have deferred commencement of the refurbishment works until after a new mortgage had been agreed and completed on or before 30 June 2023 (assuming that was ever a likely possibility). Rather they told us they’d have taken out a short-term business loan to cover the refurbishment. Putting all of the above together, it seems to me that Mr and Mrs M find themselves in the position they were always most likely to be in. That is, having repaid their mortgage including a valid and justified ERC, and with no new mortgage from BOS to make them eligible for an ERC refund. BOS’s communication failures didn’t cause or create that. All they did was raise Mr and Mrs M’s expectations and delay them finding out what was always the true position.

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That’s what BOS apologised for, and why it offered them £500 compensation. In all the circumstances, I think that is a fair resolution. My final decision My final decision is that this complaint should be fairly and reasonably resolved by Bank of Scotland plc paying Mr and Mrs M £500. I make no other order or award. My final decision concludes this service’s consideration of this complaint, which means I’ll not be engaging in any further discussion of the merits of it. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr and Mrs M to accept or reject my decision before 14 April 2026. Jeff Parrington Ombudsman

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