Tracker mortgage rise: can lenders get away with it?
“It’s a letter telling us they’re increasing our tracker rate,” one borrower joked to his wife when he saw the West Bromwich Building Society letter fall onto his hall floor this weekend. Then, he opened it: “To my horror, it was.”
The West Brom’s decision to raise the interest rate by 2% on 6,700 buy-to-let tracker mortgages made headlines this week. It also appeared to confirm fears that, after the Bank of Ireland’s rate hike earlier this year, lenders will feel increasingly able to act on previously obscure clauses in their tracker contracts.
So does the West Brom letter signal the end of the tracker as we know it? Letting Focus founder David Lawrenson told Your Money’s sister title Mortgage Solutions other lenders would be watching the situation. “I have seen get out clauses in small print on other mortgages. It goes to show that borrowers should read the small print very carefully,” he said.
So how strong is West Brom’s defence for raising its interest rates? Landlords and brokers have gleefully pointed to the mutual’s own website’s definition of a tracker: “Tracker mortgages give you the certainty of knowing that the rate you pay will move in line with Bank Base Rates.”
However, West Brom says the rate rise is backed up by a clause stating the rate might be varied to reflect market conditions and ensure the business was carried out prudently, efficiently and competitively.
The lawyer leading the class action against the Bank of Ireland rate rise, The Law Department principal Justin Selig, questioned the validity of such a term.
He stressed there was no reference to the condition in the offer letter: “In the Bank of Ireland offer letter it did say very ambiguously that they did have the right to change the interest rate. Our argument was it was buried and therefore unenforceable.
“The West Brom offer letter sets out in considerable detail what is payable under the mortgage. If there was to be any variation to the payments it should have been stated in the offer letter. The offer letter I have seen does not reference any other document.”
West Brom has argued such doubts are unfounded. It said it was confident it was acting within the terms and conditions and that the terms and conditions were clearly set out in an accompanying document to the offer letter.
Either way, the majority of the affected mortgages were sold through intermediaries, meaning advisers may be the first to hear from angry borrowers.
A second parallel between the Bank of Ireland rate rise and that of the West Brom is in the type of borrower targeted. Two-thirds of affected Bank of Ireland borrowers were buy-to-let landlords. West Brom has focused on landlords with three properties or more, who took out mortgages between 2006 and 2008.
The West Brom said it focused on these borrowers because they were professional landlords who should be aware of market changes: “Market conditions have changed significantly since these mortgage agreements were taken out, resulting in an increased cost of funding to lenders.”
The mutual described the new rates to be a fair reflection of the increased cost caused by current market conditions. Borrowers might not be happy, it acknowledged, but it hoped they appreciated why it was necessary.
If a borrower does decide to move, the West Brom will waive any mortgage exit fees that would normally be charged as long as the mortgage was repaid before 31 March 2014. Customers can also clear their balances on the same terms.
John Charcol technical manager Ray Boulger said the current unregulated state of buy-to-let indicated how hard it was to define a professional landlord: “It would be interesting to know the degree to which West Brom has left itself open to a legal challenge by setting a limit as low as three properties, particularly if only one is with West Brom.”
Affected West Brom borrowers juggling several mortgages would have a much bigger incentive to join a class action than a residential Bank of Ireland borrower, he added.
Indeed, the borrower who received an unpleasant surprise in his Saturday post had already been affected by the Bank of Ireland rate rise. When he shared his story on the landlord forum, the conversation quickly turned to the class action.
Two days on, the landlords behind it have launched a fresh drive for supporters. It seems that the West Brom’s decision to increase rates has just pushed up the stakes for the first tracker rate rise test case.