Borrowers hit with large rate rises in their tracker mortgage deals have received a largely sympathetic press. Some papers refer to “victims”, while others describe the moves by Bank of Ireland and West Bromwich Building Society to increase rates as “unfair”.
Bank of Ireland increased rates for 13,500 customers on both buy-to-let and residential mortgage tracker deals. For buy-to-let borrowers the rate rose from the Bank of England base rate (BBR) plus 1.75 per cent to BBR plus 4.49 per cent, while for residential borrowers it rose to BBR plus 2.49 per cent initially and then to BBR plus 3.99 per cent in October.
Specific clause
The Bank says that the increase applies only to mortgages with “a specific clause in the contract which allows for an increase in the interest rate differential after the guarantee period”. It later backtracked on raising the rate for 1,200 of those customers, some of whom had received correspondence suggesting the rate would be for the term of the mortgage, while the rest had contracts that did not make it clear that the rate might change.
West Bromwich is raising the rate on its tracker mortgages for 6,700 of its buy-to-let borrowers by 2 percentage points, from 1.49 per cent to 3.49 per cent. Since these mortgages are meant to track BBR, which has remained at 0.5 per cent for the 58th month running, the anger and upset are understandable. Borrowers are lodging complaints with both lenders and are complaining to the Financial Ombudsman (Fos). Some of the Bank of Ireland borrowers affected are planning a class action to test the legality of the rate increase, questioning whether the contract terms of their mortgages were fair.
But do the borrowers have a leg to stand on or are they so used as consumers to being treated with kid gloves, especially in light of the FCA’s rules around treating customers fairly (TCF), that they cannot see beyond the small print? The FCA has already said that it had no concerns about Bank of Ireland’s rate increases and West Bromwich consulted on the legality of its rate rises before contacting borrowers.
The building society is said to have targeted buy-to-let borrowers with multiple properties, effectively considering them professional landlords. That is how David Whittaker, managing director of Mortgages for Business sees things too. “These people are in a business arrangement with a lender,” he says. “It’s not a vote catcher. They can’t go and petition their MP about it. Banks do this kind of thing everyday to commercial borrowers.”
Lee Grandin, director of Landlord Mortgages, is more sympathetic. “Technically these were commercial contracts, but these are normal consumers who maybe have bought one or two properties,” he says. He also questions whether the lenders can get away with calling their products trackers when they include clauses that enable them to raise the rates in the way that they have, regardless of the BBR.
However, he admits that he can see things from both sides, conceding that the lenders would not do something like this unless it were necessary. “Lenders have to protect themselves,” he says, “It must be difficult for them, but it seems very unfair to the borrowers.”
Market conditions
Both lenders have cited market conditions with regards to their decisions to raise rates. Under current market conditions mortgage funding costs are high and these lenders are under pressure to reshape their balance sheets. Whittaker says that what they are really hoping for is that some borrowers will move away and remortgage elsewhere. This appears to be borne out by Bank of Ireland’s decision to waive any early repayment charges for affected borrowers who do decide to remortgage away from it. He says there are plenty of products available for borrowers to move to. Table 1 shows the top 10 buy-to-let trackers currently available. For those unable to move however, Mr Whittaker says it’s just “tough”.
Does this action taken by the lenders damage their reputations and put mortgage brokers off recommending them to customers in the future? Mr Whittaker says that it would not stop him recommending either firm in the future. However, as Mr Grandin points out, neither firm has to worry about its reputation much at the moment as they are not taking on any new buy-to-let lending.
Nevertheless, borrowers facing rises of hundreds of pounds in their monthly payments, especially in a climate of austerity, are understandably unhappy.
Ultimately, it looks like the issue of whether the lenders’ actions are unfair will have to be resolved in the courts. No doubt the West Bromwich borrowers will follow the Bank of Ireland borrowers in organising their own legal action.
The outcome is likely to determine whether other lenders, struggling in adverse market conditions, will also consider going down a similar route. While the two lenders have done their homework, they clearly have a fight on their hands.
