Court of Appeal ruling that it was not legally entitled to vary their tracker mortgage interest rates
West Bromwich building society will record a loss for the financial year after paying out £27.5m to thousands of buy-to-let (BTL) landlords following a Court of Appeal ruling that it was not legally entitled to vary their tracker mortgage interest rates without a change in the Bank of England base rate
The case involved around 6,000 landlords with multiple properties who had tracker mortgages, which are supposed to rise or fall in line with the base rate, which has been 0.5% since March 2009.
However, in December 2013 West Bromwich Building Society raised its rate on the mortgages, arguing that in the smallprint of its BTL contract it had said it could change the rate ‘to reflect market conditions’.
As a result, it pushed up rates by two percentage points, which in some instances meant landlords saw their monthly repayments double.
A complaint to the Financial Ombudsman found in favour of the mutual. It stated regulatory capital requirements had changed and funding costs had gone up, meaning the move was reasonable.
Subsequently a group of 400 landlords, led by retired mortgage broker Mark Alexander launched a legal battle in March 2014. This was initially defeated in the High Court, but the group has now won its case at the Court of Appeal. [Mark Robert Alexander as representative of the property118 action group and West Bromwich Mortgage Company Ltd, 2016] EWCA Civ 496].
Alexander described the action as ‘David versus Goliath’ and said: ‘This ruling sends a clear message to other lenders who have acted in a similar manner, and to those who might have been considering following suit.
‘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.’
West Bromwich building society said in a statement: ‘While we are disappointed, we accept the Court of Appeal’s decision and so will be contacting all affected borrowers, including those who were not part of this action, to advise them of the outcome and that we will be reimbursing them any additional interest charged.
‘Other saving or borrowing members do not need to take any action as a result of this news. The one-off cost of this will be approximately £27.5m.
‘Although this will result in the society recording a loss for the year to March 2017, underlying profitability is expected to be maintained and the capital position of the society remains strong and is significantly in excess of regulatory requirements.’
Jonathan Russell, partner, at UK200Group member firm ReesRussell, said the court ruling confirmed that banks cannot arbitrarily vary the conditions of a contract purely for their own purposes.
‘A contract is a contract and unless all parties agree it should not be varied unless the contract allows for such change. This was a case where the change was not allowed,’ he said.
Russell also said that West Bromwich may face additional costs as some landlords may make claims for the financial hardship that may have arisen as a result of the mortgage rate hike, and potentially for some of the tax consequences.
‘The losses and costs to the borrowers could well be much more than the extra interest charged,’ he said.