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The risks of re-mortgaging to invest abroad

Posted by , Trainee Solicitor

Fresh warnings are in place for investors considering re-mortgaging their homes to fund investments in overseas developments.

For many investors the prospect of high returns on rental property and the lure of a sunnier climate leads to vast amounts of money being invested every year in holiday homes abroad. However, these investments do not come without risk, many investors are being targeted to invest in such schemes by re-mortgaging their homes in the UK. Should repayments fail to be met the investment could be rendered worthless if precautions are not put in place prior to purchasing.

However, the case of Emptage v Financial Services Compensation Scheme Ltd [2013] EWCA Civ 729; is a shining glimmer of hope for investors seeking compensation after receiving negligent mortgage advice. In this case, the investor was entitled to full compensation on appeal under the Financial Services Compensation Scheme (FSCS). The investor followed the negligent advice of her mortgage broker by taking out a much bigger interest-only mortgage in order to re-pay her original mortgage and purchase an investment property in Spain. Unfortunately, the Spanish property market collapsed, leaving the investor with high interest payments and a big capital loss.

The original case decision

Originally, the FSCS took the approach that the investor was only entitled to compensation for losses resulting directly from the unsuitable mortgage contract which is governed by the regulators and that the losses resulting from the purchase of the Spanish property (which was an unregulated activity) were irrecoverable; meaning that the bulk of her £110,000 investment was effectively lost.

Success on appeal

The investor successfully challenged this decision in the Court of Appeal by arguing that her losses in the Spanish property were a direct result of the negligent advice from her mortgage adviser. The FSCS under the rules in the Financial Services and Markets Act 2000 have the power to pay “fair compensation” in respect of losses by applying the principles that a claimant (here the investor) should be returned to the position they would have been in had they not received negligent advice. By applying this principle, the investor sought full compensation by successfully arguing that all losses should be taken into account when assessing her claim which included the capital loss on the Spanish property.

Cases in the future

Despite the ruling in the case of Emptage, investors should still be on guard for potential exposure to negligent mortgage advice; it is after all only very similar cases that will follow in the footsteps of the Emptage case. The distinction here is that the loss arose as a direct result of regulated advice in relation to a purchase for investment purposes, not simply somewhere to live. Clearly it is not all plain sailing and investors considering purchasing property abroad should seek independent legal and valuation advice applicable to that country prior to purchasing.

If you think you have a claim for professional negligence against your mortgage adviser, we can offer free impartial advice. Contact a member of our team today on 0800 051 8057.

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