Pepper (UK) Limited · DRN-6256502

The complaint Mr A complains about fees and charges added to his mortgage with Pepper (UK) Limited trading as Engage Credit, meaning he was left with an outstanding balance at the end of the term. What happened Mr A took out his mortgage in 2000. Engage wasn’t the original lender, but the mortgage was later transferred to Engage. The term of the mortgage ended in January 2025. Engage wrote to Mr A explaining that there was still an outstanding balance left to pay, because of fees charges and additional interest added over the years. Mr A complained. He said he hadn’t been made aware of additional amounts added to his mortgage. He said Engage should prove that he owed these extra sums, and he didn’t think it was fair that he was being expected to pay more. Engage said that the outstanding balance was correct. It said that the previous lender had added fees to the mortgage balance, including fees related to the original application, plus fees for returned direct debit payments when it hadn’t been able to collect the payments due. The fees were added to the mortgage and attracted additional interest on top of the interest due on the amount borrowed. Our investigator didn’t think the complaint should be upheld, so Mr A asked for it to be reviewed by an ombudsman. I took a different view so I issued a provisional decision setting out my thoughts on the complaint. My provisional decision I said: “The fees added to the balance over the years are £345 relating to the original lending (the application fee, funds transfer fee and an insurance fee), plus a £20 charge for requesting copy statements in 2005 and two bounced direct debit fees of £25 each, one in 2006 and one in 2008. All these fees were charged by the previous lender, and Engage says that due to the passage of time and the transfer of lender it doesn’t have any more information about the circumstances in which they were charged. Charges for those things are not inherently unreasonable. In the absence of evidence showing that charging them wasn’t justified in Mr A’s particular circumstances at the time, I don’t think I can safely find that the mere existence of these fees on the mortgage balance meant that the relationship between Mr A and Engage as the successor lender was unfair at the end of the mortgage term. However, I do think that Engage hasn’t acted fairly more recently, since it took over

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the loan in 2020. The previous lender included the outstanding fees balance in the monthly payment, adjusting the monthly payment on a quarterly basis to make sure that enough was collected to ensure both the main mortgage balance and the fees balance were paid off by the end of the term. In practice, this meant that around £6.50 of each monthly payment Mr A made was used to reduce the fees balance. When Engage took over the mortgage in 2020, it stopped doing that. It kept the monthly payment the same at first, but applied all of it to the main balance and stopped reducing the fees balance. When the monthly payment changed, because of changes in the interest rate, Engage re-calculated the amount due based only on the main mortgage balance without taking account of the fees balance. That means that before Engage took over, Mr A was on track to repay the entire mortgage in full by the end of the term. But once Engage took over, and it changed the way the payments were calculated, he was now only on track to repay the main balance. Engage no longer collected payments towards the fees balance. The effect of that was that more interest was charged on the fees balance, because it now wasn’t being reduced, and that Mr A would be left with an outstanding fees balance at the end of the term. I don’t think this was fair. The previous lender was managing the mortgage in such a way that the entire amount owing would be paid off by the end of the term. But Engage changed it to manage the mortgage so that there would still be a fees balance remaining. I’ve not seen any evidence that Engage told Mr A about this change, or advised him that he could repay the fees balance separately in addition to the payments it was collecting for the main balance. It did include the fees balance in the annual statements. The annual statement did say that “should you have an arrears and / or fees balance you will need to make additional payments in excess of your normal monthly instalment to clear these and prevent additional interest continuing to accrue”. But I’ve not seen any evidence that Engage specifically drew Mr A’s attention to this, or to the fact that it had changed the way the mortgage was being managed, or told him what extra amounts he would need to pay that were no longer included in his monthly payments. If Engage had continued with the previous lender’s arrangement, the fees balance would have been cleared by the end of the term. There’s no evidence Mr A was experiencing financial difficulties, or that he would have been unable to pay the extra around £7 per month this would have entailed. In the circumstances, I think the fact that Engage changed the way the mortgage was being managed so that the fees balance would no longer be repaid by the end of the term amounts to underfunding. Mr A’s mortgage was on track to be paid off by the end of the term, until Engage changed things so that it was no longer on track. The Financial Ombudsman Service has a very longstanding approach to mortgage underfunding, as set out on our website. We take the view that where a mortgage is underfunded, it’s fair and reasonable to expect the lender to make up the underfunded amount.

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Had Engage continued with the previous lender’s arrangement, Mr A would have paid off his mortgage by the end of the term. He wouldn’t have needed to make the extra payments in February and March 2025 to repay the fees balance. In the circumstances, I think the fair way to put things right is to require Engage to put him back in the position he would have been in had he cleared the mortgage balance at the end of the term. That means it should refund the additional payments Mr A made in February and March 2025. Although this was a joint mortgage, and the other mortgage holder is not party to the complaint, I’m satisfied I can fairly make this award. Mr A and the other party are divorced. It was Mr A who actually made the payments in question, and so it’s fair and reasonable that they be refunded to him.” In reply, Mr A said he accepted the proposed refund. But he said that I should also require Engage to compensate him for the upset caused by chasing him for payment after the term ended even though he told it the amount claimed was disputed. He believed his mortgage would be paid off by the end of the term and that’s what should have happened. Engage said that the fees balance consisted of fees charged by the original lender when the mortgage was taken out. Those fees were collected as part of the mortgage payments, but that was stopped by the previous lender in 2020, before the loan was transferred to Engage. In addition, there were two missed direct debit fees and one statement request fee – amounting to £70 in total – which were never included in the monthly payments and which Mr A would always need to have paid separately. It said the annual statements made clear that Mr A would need to make separate arrangements to pay the fees balance. It didn’t agree the complaint should be upheld. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. I’ve also considered what the parties have said in response to my provisional decision. But I haven’t changed my mind. Almost all the fees balance was being collected through the monthly payment. Whether that was changed by Engage or by the previous lender doesn’t in my view matter. The fact is that most of the fees balance was on track to be repaid by the end of the term, until the change of approach – which wasn’t, as far as I’ve seen, directly communicated to Mr A. As the current lender, Engage was responsible for ensuring that the mortgage was collected fairly. I’m not persuaded that Mr A was treated fairly. However, I don’t think it would be fair to require Engage to compensate Mr A in addition to refunding the additional payments he made beyond the end of the term. If the fees balance had been collected during the term, those are payments Mr A would have made. By refunding them now, he will benefit from not having to do so, and I don’t think it would be fair to require additional compensation on top of that. This is consistent with our approach to mortgage underfunding. My final decision My final decision is that Pepper (UK) Limited trading as Engage Credit should refund to Mr A the payments he made in February and March 2025, adding simple annual interest of 8% from the date each payment was made to the date of the refund. It may deduct income tax from the 8% interest element of my award, as required by HMRC, but it should give Mr A a tax certificate so that he can reclaim the tax if he is entitled to do so.

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Under the rules of the Financial Ombudsman Service, I’m required to ask Mr A to accept or reject my decision before 28 April 2026. Simon Pugh Ombudsman

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