The Court of Appeal has ruled West Bromwich Building Society was wrong to vary mortgage interest rates in the absence of a change in the Bank of England base rate.
West Bromwich Building Society was taken to court by landlords over an increase in their tracker mortgage rates.
Mark Alexander, who runs Property 118 Action Group, representing 350 buy-to-let landlords, accused the building society of illegally increasing the interest rate on their mortgages by nearly 2 per cent in December 2013.
The landlords claimed West Bromwich’s tracker mortgages were sold on the basis that the interest rate would be fixed to the Bank of England’s base rate, which has remained at 0.5 per cent since March 2009.
But the building society said clauses in their standard terms and conditions allowed it the discretion to change the rate to reflect market conditions, even when the Bank of England’s base rate remained fixed.
Mr Justice Teare sided with the lender in a ruling at the Commercial Court in January 2015, but Mr Alexander won the right to appeal and raised more than £500,000 to take the case to the Court of Appeal.
Today (8 June) the Court of Appeal overturned Mr Justice Teare’s decision.
The decision affects landlords who took out their mortgage up to 2008 and will result in a one-off cost to West Bromwich Building Society of about £27.5m as it has been ordered to reimburse affected buy-to-let investors.
The one-off cost will result in the society recording a loss for the year to March 2017, although underlying profitability is expected to be maintained and according to the lender’s bosses the capital position of the society remains strong.
Jonathan Westhoff, chief executive of West Bromwich Building Society, said he accepted the court’s decision but said his board had acted in accordance with its overarching duties to treat customers fairly and to act in the best interests of members as a whole, savers as well as borrowers.
He pointed out savers, who represent the vast majority of the society’s members, suffered a dramatic fall in income due to lower interest rates.
Mr Westhoff said: “Naturally we are disappointed by today’s decision from the Court of Appeal.
“At all times we acted to ensure we were treating customers fairly and that our approach was in the best interests of the society and its members as a whole.
“We will now contact all affected borrowers and ensure we process promptly any reimbursement they are due. In line with our prudent approach to managing the society we had already allocated capital to cover this unexpected outcome and so the society remains in a strong financial position.”
Mr Alexander said the ruling sent a clear message to other lenders who have acted in a similar manner, and to those who might have been considering following suit.
He said: “There are thought to be in the region of one million tracker buy-to-let mortgages, which could have been affected if this case had gone the wrong way.”
Danny Matthews, mortgage adviser and podcaster, said: “Lenders find it hard enough to build trust and this sort of story will not help that situation.”