Kick in the teeth for buy-to-let landlords
Buy-to-let landlords are considering taking legal action against a move by some lenders to increase the interest rates on tracker mortgages using little known clauses buried deep in the terms and conditions.
The desire to push rates higher goes back to before the financial crash, when some landlords and a number of residential mortgage customers opted to pay a higher rate of interest for a year or two on a tracker mortgage in the knowledge that after a set period the interest rate would fall back to a much lower pre-set margin over the Bank of England base rate. This worked well until the base rate collapsed to a 300-year low at 0.5 per cent. For a while after the crash, the wholesale money market froze, as no-one was willing to lend anything to anyone. However, as credit conditions eased and expectations slowly grew that at some time interest rates would no longer be artificially suppressed, lenders found themselves in the awkward position of paying more for wholesale funds than they were getting back on tracker mortgages.
The Skipton Building Society and the Bank of Ireland moved to address the problem simply by telling mortgage holders they would have to pay more, although the Bank of Ireland back tracked in a number of cases following a rush of customer complaints.
Cynically though, lenders have singled out landlords with more than three properties, working on the basis that these would not be viewed as consumers, the latter being protected by the mortgage watchdog. And the Financial Conduct Authority has refused to get involved, claiming that these are not consumer mortgages. In effect, this has encouraged lenders to treat multi-asset buy-to-let borrowers completely differently.
The final straw came when the West Bromwich Building Society decided to adopt the same approach late last year, when the society's specialist lending arm, West Bromwich Mortgage Company, announced that a quarter of borrowers with multiple properties would face a two percentage point rise from 1 December. The 6,700 borrowers affected were all buy-to-let landlords, and an average lending rate of 1.65 per cent suddenly became 3.65 per cent. In doing so, the society referred to a clause stating that the rate may be varied to reflect market conditions and ensure its business is carried out prudently, efficiently and competitively. Affected West Brom borrowers, who are all landlords with multiple properties, have until March to comply, repay or move their mortgages elsewhere without incurring an exit fee.
It might be argued, however, that the situation could have been avoided if the agents of the company had acted prudently, efficiently and competitively in the first place. So he question now - and one which will probably be one that will be for the courts to decide - is whether lenders such as the West Brom have acted illegally. Both sides have some factors to support their case. The building society maintains that it is acting within the terms and conditions clearly set out in a document accompanying the offer document. However, The Law Department principle Justin Selig argues that as these details were not included in the offer document accompanying any mortgage application they are unenforceable. And founder of LettingFocus.com David Lawrenson, who is himself a landlord with a number of properties mainly in South London, maintains that the small print clauses being used by the West Brom were always and clearly meant to apply to standard variable rate mortgages. "These were tracker mortgages following a set margin over base; they were never a standard variable rate mortgage," he argues. It is also worth noting that late last year when the furore started, the West Brom quietly deleted from their website a statement that tracker mortgages gave borrowers the certainty of knowing that their mortgage would always follow the Bank of England base rate (see http://www.property118.com/wp-content/uploads/2013/09/West-Brom-Screen-Shot-21.png).
So what should landlords with three or more properties and buy-to-let mortgages do? The big worry is that other lenders will be watching developments and may also decide to act by pushing up rates on base rate tracker mortgages. For any landlord looking to take out a new mortgage the message is simple: read the small print, and don't sign anything until you have read the general terms and conditions. If these are not automatically sent with the mortgage offer document, you might want to ask yourself why? If you already have a buy-to-let mortgage there is a choice. The first option, which does little more than kick the problem further down the road, is to bite the bullet and pass on the increased cost to tenants. The other option is to stump up £240 and join the action being organised by The Law Department. So far, not many landlords have gone down this route, but it's worth noting that if any legal action is unsuccessful, it might give lenders cart blanche to set rates wherever they like.