Ombudsman rules that lender West Brom can raise tracker mortgage rate without Bank Rate rise
Buy-to-let mortgage customers are being told the lender had a viable commercial reason to impose shock rate rise
Sarah Piggott said she would appeal the ombudsman service's decision.
By Nicole Blackmore
The financial ombudsman has dealt a blow to thousands of West Bromwich buy-to-let tracker mortgage customers fighting a shock rate rise that saw their repayments spike.
The ombudsman, which has been sitting on a raft of complaints for up to a year, has begun issuing decision letters saying the lender had legitimate commercial reasons to vary its tracker rate. (click here for a scanned copy of the letter)
In September 2013, West Brom announced it was raising rates for 6,700 buy-to-let tracker borrowers by 2 percentage points in December. This more than doubled some customers’ rates and significantly increased their monthly repayments.
The change affected "professional landlords" with three or more properties who took out at least one mortgage through West Brom's now defunct lending arm, West Bromwich Mortgage Company.
Customers complained in droves about the rate rise because the Bank of England's Bank Rate has remained at 0.5pc since March 2009.
Borrowers were sold tracker loans on the basis that they track Bank Rate, plus a margin. This margin was set at the time the mortgage was taken out and does not usually change during the term of the loan.
West Bromwich's own website described a tracker mortgage as a product that "gives you the certainty of knowing that the rate you pay will move in line with Bank base rates".
Borrowers say the building society's "key facts" documentation did not state that the lender had the ability to increase rates if Bank Rate did not rise. Instead the condition was buried in fine print.
A clause in its mortgage terms and conditions stated West Brom could increase the tracker rate without any movement in the Bank Rate to "reflect market conditions and to make sure its business is carried out prudently, effectively and competitively".
It is widely known that many lenders are losing vast sums on their tracker deals because they set their margins too low before the financial crisis, during which interest rates plummeted. Many have been carefully going through their small print to see if they can increase their margins, which is easier to do for buy-to-let investors as they are not protected by the same consumer protection regulations as residential buyers.
A group of borrowers, lead by landlord portal Property118.com, is suing West Brom in a case due to be heard in the courts on 21 January.
But ahead of this the ombudsman service has decided that the lender had valid reasons to vary the interest rate.
The ombudsman's reasoning
In one decision letter, seen by the Telegraph, the ombudsman says that because West Brom’s regulatory capital requirements had changed, its funding costs had gone up and market conditions had changed, its actions were justified.
“I am satisfied that the terms and conditions of the mortgage you have, allow West Bromwich to increase the interest rate in the way it has,” it said. “West Bromwich has satisfied us that there is a legitimate commercial reason for it doing so. It has not acted unfairly in changing the interest rate or in the way it has done so.”
A spokesman for the ombudsman service said it has been unable to look at the way the loans were sold to customers because “in the majority of complaints the mortgages were sold by an intermediary so instead [we] have to investigate West Brom’s responsibility as the lender”.
She said the ombudsman service considers all cases on their individual merits but most loans sold through brokers will be rejected.
She added the service will throw out any complaints brought by customers involved in the upcoming court case, or by “large, commercial landlords”.
When pushed on what constitutes a large, commercial landlord, she said the service will consider whether the borrower is a business or an individual, what they are using the income for and how many properties they are renting out.
Sarah Piggott, a former lawyer for housing charity Shelter, received one of the rejection letters this month. She is planning to challenge the decision by referring it back to an ombudsman.
Ms Piggott said the adjudicator on her case has not considered the Unfair Contract Terms Act. It can be used to delete an unfair term, especially where there is inequality of bargaining power or one party has drafted the contract and later tries to take advantage of an ambiguous term.
She will also dispute the assumption that she is a professional landlord.
Ms Piggott has three buy-to-let properties but only one with West Brom. Her monthly mortgage payments rose by £250 last December.
"I'm not a sophisticated buy-to-let investor – just someone who has moved house more than once and chosen to rent the house I'm leaving rather than sell it, and I don't think their discriminatory rule should apply to me,” she said. “I'm more of a multiple landlord by accident, and it's certainly not my business in any sense of the word."
She sold one flat to help reduce her debt with West Brom and convince the lender that she’s not a professional landlord, however it insisted the classification had already been made and could not be reversed.
Kathy Dunn has two buy-to-let properties that are mortgaged with West Brom. The combined monthly payments on these loans jumped from £288 to £657 last December.
She complained to the financial ombudsman almost a year ago and has just received her rejection letter.
“I certainly do not consider myself a professional landlord and even if I was I do not see how that should affect the contract I made with West Bromwich at the time I took out the mortgages,” she said. “I have decided to appeal against the decision. It is my opinion that [West Brom’s] decision [to target professional landlords] had more to do with the fact that the buy-to-let sector is not formally regulated and they had more chance of wriggling out of it than any considerations of fair play.”
The City watchdog, the Financial Conduct Authority, is investigating whether mortgage lenders should be allowed to change borrowers’ contract terms. It is expected to report back early next year. Last November it wrote to banks and building societies warning that changing customers' terms could breach consumer protection laws.