Ruling sets a precedent

The complaint against West Brom dates back to December 2013 when, despite no movement in the Bank of England base rate, the lender increased rates on its tracker mortgages. Customers were outraged, given that they were under the assumption that a base-rate tracker would track bank rate and the lender could not make its own decisions as to what the rate should be. It proved to be an expensive move for customers, with many finding that their monthly mortgage payments doubled. However, following a long battle, the Court of Appeal found against the lender, a decision that could cost West Bromwich £27.5m. As well as a refund, borrowers will be returned to the lower rate, which the Court of Appeal ruled they should have been on all along.

West Brom was not the only lender to raise its rates, and those who did the same are bound to be watching the ruling with great interest because it inevitably sets a precedent. The Bank of Ireland, Skipton and Manchester building societies have all raised their rates in the past few years. In March 2013 the Bank of Ireland increased mortgage rates for 13,500 of its customers – both landlords and ordinary homeowners – on tracker deals. As with West Brom, these were substantial increases, with rates rising from 2.25 per cent to 4.99 per cent, almost doubling some customers’ monthly payments.

Meanwhile, Skipton Building Society raised its standard variable rate in 2010 from the capped level, which was 3 percentage points above bank rate. This meant customers ended up paying 4.95 per cent. Manchester BS also got in on the act, raising some rates from 0.99 per cent to 4.95 per cent on tracker mortgages for both residential customers and landlords.

Part of the problem is that none of this is straightforward as mortgage conditions vary from lender to lender so the case law can not be used. But Mark Alexander, who brought the case against West Brom, is crowdfunding to raise money to fund similar challenges to Bank of Ireland, Skipton and Manchester building societies. Meanwhile, these lenders are standing by their decision to hike their rates.

In response to complaints from borrowers, the Financial Ombudsman Service found in favour of these lenders, but has said since the West Brom ruling that it may now reconsider complaints against the Bank of Ireland. Much will hinge on the lenders’ small print as to whether they are within their rights to hike rates as, and when, they wish. The Bank of Ireland told the Daily Telegraph that its “offer document and mortgage terms and conditions expressly stipulated that the tracking margin or differential could be varied, and the offer and mortgage conditions documents are consistent, allowing for the differential to be lawfully changed”.

The problem is that we are living through particularly unusual times when it comes to interest rates, and lenders have been well and truly caught out. Nobody envisaged that rates could be so low for so long – a situation that shows no signs of changing. Many lenders have been losing a lot of money, hence their decision to change terms on lifetime products and raise rates. In the case of the building societies, they have argued they were forced to do this in order to protect their members’ best interests. These lenders will have taken legal advice before taking action and will have been advised that they were acting within their rights.

However, while lenders may have felt this was the case, it has been hard for borrowers who perhaps are not as well-versed with the small print of their mortgage contracts and who were shocked that their mortgage rates increased at a time when interest rates had been static for many years. Many have subsequently struggled to make the higher payments, putting their properties at risk.

The small print of these contracts may give lenders the right to do what they want in extreme conditions. But it is then necessary to define and agree what happens in extreme circumstances.

The popularity of base-rate trackers has grown in recent years because borrowers have taken comfort from the security they seem to offer in tracking base rate. The problem with discounted-variable rates, which had previously been popular, was that they were linked to the borrower’s standard variable rate, which was set at their discretion. So while the margin remained the same – say 2 per cent off the SVR – if the SVR did not fall in line with base rate (which was often the case) then the customer would not feel the benefit of any rate cut and would be paying more than they needed to.

As far as the future is concerned, lenders are likely to be far more cautious when it comes to what they offer. They will be keen to ensure that any new products will always be commercial, as well as attractive to customers.

It will make sense to offer shorter facilities, rather than lifetime deals. If a lender offers a five-year facility and rates move against it, it may decide to sweat it and not offer it again after that time because there will be a limited impact. Most commercial banks offer five-year facilities for this reason, reserving the right to review terms before they renew them.

But if a lender offers a 20 or 25-year deal, it is difficult to wriggle out of it if the lender wants to shrink that loan book. For example, those borrowers paying 1.75 per cent over base rate for life, giving them a pay rate of just 2.25 per cent, will not be shifted off those deals quickly. These products are no longer available because commercially they are not viable, but it is not going to be easy for lenders to get out of existing deals.

Those lenders who may be thinking of trying to wriggle out of contracts in the future may think twice because of the West Brom outcome, so it has been useful in that respect and will perhaps give borrowers some protection. But some of the smaller lenders are suffering and with interest rates unlikely to rise in the near future, that situation is unlikely to change.

Of course, if rates had moved against lenders and borrowers were paying a lot more because they were high, there would be little sympathy for them. It is the way things are. But borrowers should know absolutely where they stand when signing up to a deal and whether they do have security that prevents their lender from raising rates as and when to suit itself. Otherwise it is very hard to budget and the property is put at risk.

Mark Harris is chief executive of mortgage broker SPF Private Clients