West Bromwich’s Tracker Rate Victory Could Cost £2,000 million

Incredibly, two weeks ago,  the West Bromwich Building Society won a case in the High Court allowing it to increase margins on tracker rate mortgages, despite their being no increase in the Bank of England base rate, says David Lawrenson of LettingFocus.com. This has huge implications for all mortgage borrowers with a potential cost up to £2,000 million per annum in extra interest.

West Bromwich Lifetime Tracker Mortgage

The case, which was bought against the Building Society by Mark Alexander, founder of the online landlord news and discussion forum Property118.com, and represented a further three hundred and sixty disgruntled landlords whose tracker rates had been hiked despite the mortgage document they signed making clear that the mortgage rate “would be set at Bank of England Base rate (plus a margin of 1.99% in Mr Alexander’s case) until the term end”.

This move by the West Brom, which follows similar rate hikes to tracker mortgage margins by other lenders (including on residential mortgages), to wriggle out of tracker mortgages is quite astonishing, given the recent environment in which banks and other financial services companies seem to be competing to make the headlines for all the wrong reasons. We have, of course, seen swaps being miss-sold to small businesses, rigged LIBOR and Forex rates and unsuitable PPI policies being sold to retail customers.

The background to this story lies back in the pre-credit crunch days, when many savvy landlords (and quite a large number of residential mortgage customers) took out base rate trackers.

In 2008 the wind changed with the credit crunch and suddenly the cost of servicing these mortgage deals in the money markets got very expensive for some lenders who borrowed short and lent long. So, for example, whilst there were borrowers on trackers paying at fixed margins of anywhere between 0.5% and 2.5% over BOE base rate, the cost of providing these mortgage was suddenly costing the banks and building societies much more than previously, thus eating into their profit margins and in some instances resulting in losses.

Buy to Let Tracker Rates that Did Not Track

Well, too bad for the lenders, one would think – that’s just the price of making poor lending decisions – and those lenders whose forecasts and lending strategies failed to predict the credit crunch and the adverse future funding environment would have to just take the hit. The lenders had written the mortgage contracts, surely they would have to just stick with the bad deal now? In all other walks of life you make your bed and you lay within it!

However, it seems that many of these lenders were actually not at all happy to take the hit – and so they started desperately looking for ways to try to wriggle out of these deals.

So, many lenders set their lawyers to work and to see if there was any way out.

In particular, could it just be possible to twist the meaning of generic clauses buried deep in terms and conditions in separate general mortgage terms booklets, and which were clearly (to just about everyone else) never meant to apply to base rate trackers at all?

How West Bromwich Building Society Cheated Their Borrowers

The clauses used in the case of West Brom are found in a General Conditions booklet which is generic to their entire mortgage range. To any reasonable man it is clear that the conditions they are referring to are to empower them to vary a standard variable mortgage rate, the terms of when a tracker rate can be varied are very clear, e.g. 1.99% over base rate until the end of term, in Mr Alexander’s case, a further 21 years. However, this was not understood by Mr Justice Teare who made the bizarre ruling at High Court level that both clauses could be read together, despite the fact that the General Conditions booklet saying that if terms are inconsistent the terms contained in the Offer of Loan shall prevail. The group are of course seeking leave to appeal.

The booklet which has caused so much confusion also stated that the borrower cannot let out the property – which one would rather think shows that the terms in it cannot be relied upon for what is, after all, a buy to let mortgage

The West Bromwich and other lenders applied these changes unilaterally, hoping no doubt, that no individual borrower would have access to the hundreds of thousands of pounds to pay legal fees to fight a case, which would inevitably end up in the Courts.

So borrowers were told to pay the new hiked rate in full or the lenders would take action to repossess their property.

The Cynical West Brom Building Society

In the case of West Bromwich, they cynically singled out borrowers with 3 or more properties as they would have less protection. Incredibly, they even admitted in court that this was because they were concerned that borrowers with less than three buy to let loans could be protected by the regulations which govern unfair terms in consumer contracts. Quite an admission – as it suggests clearly that they must known what they were doing was wrong.

Furthermore, West Brom only applied the rate hike to mortgages that had been sold via brokers. They didn’t increase the Tracker Margins for clients who had arranged identical mortgages directly via the Building Society.

They also hoped that the FCA would adopt its usual stance and stand idly by, citing the fact that buy to let mortgages are unregulated and thus their hands were tied. On this, they were absolutely correct.

After similar moves by Skipton and Manchester Building Societies and the Bank of Ireland had gone unchallenged in the Courts, a group of landlords finally decided they’d had enough and fought back.

Whilst the actions of West Brom did not affect homeowners, those of the other lenders did. Is it just a matter of time before all Tracker Rate mortgages are target by unscrupulous lenders who pay huge fees to lawyers to find legal loopholes too?

Mark Alexander and Property118

The website Property118 led my Mark Alexander (who has an affected West Brom tracker mortgage) started a representative legal action – and the case was eventually heard in the high court on 21^st January 2015, but incredibly the landlords lost.

Mark Alexander and his group are seeking leave to appeal but may not be able to afford to do so if it is granted. This is because an appeal would entail even more cost in this David v Goliath battle.

For obvious reasons, at Letting Focus we are hoping that the appeal will go ahead and we are encouraging as many people as possible to contribute to the “fighting fund”. The potential consequences of allowing the judgement to stand are terrifying as is is likely   that all other lenders will follow suit. It is believed that around 1 million loans are on Tracker Mortgage terms (both residential and buy to let).

In our opinion, the judge has erred badly – this is an error of judgement by him and a breach of faith by the lenders.

In our view, this is a scandal that should be up there on the scale of the PPI debacle as, if/when other lenders follow suit, it will lead to huge costs for a huge number of people – potentially other residential borrowers on trackers as well as those with tracker buy to let loans.

I suggest that mortgage brokers and all individuals doing mortgage or savings or any other financial business thinks hard about whether they continue to do business with companies who have done this – companies who are clearly not above breaking what, to any sane person, is a clear and fair contract.

Notes:

1. Mark Alexander at Property118 estimates there are a million of these loans outstanding. If each has £100,000 capital outstanding and they are hiked by just 2% (though of course they could be hiked more), this will cost borrowers £2,000 million per annum in extra interest.
2. In the case of some other lenders’ tracker loans we have seen, many borrowers often took the pain of paying high fixed or variable interest rates for a year or two (and often high mortgage application fees too) in the knowledge that the “follow on rate” on these mortgages would, after the initial year or two, fall back to a much lower and pre-set margin over the Bank of England’s (BOE) base rate for the rest of the term of the mortgage – as they had been promised it would by the lender with the fact of this confirmed by the documentation they were given. They will be particularly aggrieved if their tracker rates are hiked.

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