West Bromwich Building Society Mortgage Rate Hike

David Lawrenson, private rented sector expert and director of LettingFocus.com, highlights the risks to lenders of invoking terms in the small print of mortgage contracts to hike landlords’ tracker mortgage rates.

At previous blog posts we predicted that it was likely that other lenders would follow the Bank of Ireland’s move in hiking interest rates on buy to let mortgage tracker loans, by citing clauses in the small print of their mortgage agreements. And we have been proved right. The West Bromwich Building Society has become the first to follow the Bank of Ireland, no doubt aware that the FCA does not want to get involved in these buy to let loan arrangements. And it is a move that is causing much consternation among landlords and their advisors. But we think there are real risks for the lenders who copy West Brom and Bank of Ireland’s moves.

Background

Here is some background to the story.

Back in the days before the credit crunch of 2008-9, many mortgage companies completely mis-priced their mortgage loan deals when they sold mortgage loans with lifetime tracker rates at tiny margins above Bank of England (BOE) base rates. We have seen some residential lifetime tracker mortgages that were as low as 0.3% above BOE base and buy to let lifetime trackers that were as low as 0.7% above BOE.

Mortgage lenders cannot get lots of funding to back loans over the long periods typical of an average mortgage, so most of the lenders funding comes from shorter term financial instruments and/ or customer deposits. The problem is the short term instruments are now a lot more expensive, relative to central bank base rates, than they were pre-2008. Clearly many lenders never anticipated a short term funding environment like we have today. So, facing funding rates that are so much higher, many lenders are now incurring savage losses on these tracker deals. And so the lenders have been carefully going through the small print of their past mortgage agreements to see what “wriggle out” room there might be.

On residential loans, because of much greater regulation, lenders cannot invoke a “get out clause” based on a term that was hidden away in the small print – the regulator would simply now allow it.  But in the case of buy to let – with little regulation – unfortunately, for landlords there exist some “ways out” for lenders.

Small Print

And the lenders arguments, made forcefully by West Bromwich is that as landlords are supposed to be professional business investors, they are therefore supposed to have had the gumption to read all the small print.

So lenders have started targeting the buy to let landlords, (providing of course, that their own small print allows that lender a possible way out).

But it may make some business sense for the more unscrupulous lenders. Given that private landlords tend to not get such a great press anyway, the possible public relations impact may also be limited, even if the means of doing this may appear to be more than a little questionable.

Issues for Lenders

But there are some things we think the lenders considering copying Bank of Ireland and West Brom need to consider carefully. (And also, some of these points may be issues for price comparison sites and mortgage brokers).

1. How were (and are) these mortgages actually being marketed and presented – both at the lenders and brokers sites and also at the price comparison portals? Was there any mention and clarity here (and in the lenders and brokers small print) that the “go to” lifetime margin over BOE base could be amended in this way. (It goes without saying that most borrowers claim to have assumed that the margin was set at a fixed amount of BOE base for life of the mortgage).

Amazingly, as we write, West Brom’s tracker mortgage page online is still extolling the benefits of tracker rates as a way to fix one’s mortgage for life. (No mention of any “get out” clauses there.)

2. How can a lender know or show that mortgage applicants were professionals and not amateur / accidental investors at the time when they applied for the mortgages? And related to the same point, what is the definition of amateur and professional landlord anyway? If they are deemed to be amateur landlords, and therefore possibly “consumers” – notwithstanding any FCA view on this – then there may be a case to say they should be protected by the rules on unfair contracts terms in consumer contracts. This means the lender could still be on shaky grounds if key terms such as possible hikes to the margin of mortgage rate over base rate were hidden in small print.

Indeed, there is some history here. In the case of Foxtons and unfair renewal / repeat fees charged to landlords, it was found in the highest court that many smaller time landlords were consumers and that Foxtons attempts to hide key terms in the small print acted as a “trap” to consumers and was a breach of fairness in consumer contracts. There may be parallels here. (Note, in the Foxtons case the question of exactly how many properties can be let before a landlord is deemed to no longer be a “consumer” was left open for fellow learned friends to mull over).

3. Many borrowers who are affected by these lenders moves are saying they did not even see any small print saying that the lender could up the margin over BOE base rate. Others say that the mortgage contract document they signed made no reference at all to any other document, (such as a “general terms and conditions” document), where the “get out” clause was listed. Borrowers may be able to argue that it is up to the lender to prove that the separate document was: a) in existence b) actually sent to them c) clearly, and at the time the main document was signed, somewhere clearly referring to the lender being able to increase the tracker margin.

4. If more lenders copy the Bank of Ireland and West Brom moves – and more borrowers are affected – it raises the odds that an organised legal challenge could occur. Website Property 118 has started a campaign and class action but wider support could be engendered if other lenders copy the move. Possibly, the landlords associations could even get involved too. Is it likely that other lenders could copy the Bank of Ireland and West Brom? Barclays –Woolwich is an interesting case. This lender historically had some very cheap trackers. In their case their rates on buy to let mortgages were linked to the BARCLAYS BASE rate not the Bank of England (BOE) base. For at least 10 years, this has always been same as the BOE base rate (currently 0.5%) but this still gives them a possible way out from lifetime tracker mortgage deals which are as low as 0.69% over base. However, this would mean hiking the BARCLAYS BASE rate – and this may have complications in the rest of their business. (Another lender which uses its own base rate as the “tracker marker” is NatWest). A large lender like Woolwich would seriously raise the stakes of legal action due to the much larger numbers of people affected.

Recently, we have seen paperwork of other major buy to let lenders which often have a wide set out “get out” clauses too.

In the case of the C&G and BM mortgage contracts we have seen, there is a “get out” clause in a “general terms and conditions” document but this document is not referred to at all in the main mortgage document.  The same applies for Woolwich. In the case of all four Mortgage Express cases we have seen there would appear to be no “get out” clause for the lender to use.  The same goes for Bank of China mortgages.

5. As, in many cases the “get out” clauses are in the general terms and conditions documents but not in the Key Facts document and as the general Ts and Cs are not available to borrowers until the valuation is completed and the mortgage offer is actually received or after the mortgage has started, the lenders positions would seem to also be weak.

6. Finally, and this is the key point: I think it will be obvious to many people (and probably to any judge too) that the clauses in the general terms and conditions that refer to “funding issues” and the like as a possible reason to hike rates must surely only relate to rates on standard variable rate mortgages. They will conclude that these terms were never meant to apply to trackers. After all, all the other documentation that the customer signed and all the marketing material refers to the margin over the base rate as being at a fixed margin over base.

It very much looks like the lenders, desperate for a way out of these contracts, hired lawyers who suggested the lenders use a term and condition that was never meant to apply to base rate trackers and to somehow apply these terms to the tracker mortgages.

I don’t think this argument will stand up in court so the lenders hopes must rest on borrowers being unable to get the necessary financial firepower to fight them in court. (It looks from early indications as though the FCA will not help landlords out, so court action may be the only way out for the borrowers).

Rewards and Risks

Mortgage companies will need to tread very carefully here. The rewards to lenders from hiking mortgage rates in this way are quite big. But the risks are actually quite high too. Apart from the risk of bad PR and losing an expensive court case, there is also the risk of losing customers too.

Not all landlords are big players – many could be classed as “accidental landlords” who let a property because they could not sell it. There will be some sympathy for them and for others who have just a few properties to help with retirements already decimated by the other activities of the financial services industry. Some landords will also inevitably respond by closing their sometimes substantial banking relationships with any bank that they perceive have not “played fair.” And mortgage brokers may choose to shun the same lenders in the future too. Lenders will have to tread carefully.