Mortgage lenders move the goal posts
Home owners are facing unexpected mortgage rate rises as lenders exploit loopholes in original contracts.
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Home owners should be carefully scrutinising their original mortgage offers for nasty surprises that could push up monthly payments. Experts have warned that lenders are going through previous mortgage contracts with a fine-tooth comb, looking for any legal ways to push up interest rates for those on cheap tracker mortgages or standard variable rates.
Manchester Building Society is the latest to invoke little-known contract clauses to push up mortgage rates for customers. It is raising tracker rates for some from between 1pc and 1.5pc to 3.99pc and then 4.74pc, despite the fact that its mortgages track Bank Rate, which is still at a record low of 0.5pc.
The mutual said it was able to do this because of a clause in contracts that customers signed, allowing it to give 12 months' notice of new mortgage rates unlinked to Bank Rate after five years.
"This was clearly set out in the terms," a spokesman said. "We have a duty to all of our borrowing and savings members and need to appropriately balance their competing interests. For every borrowing member we typically have seven savings members and there is a fine balancing act in managing the interest rates that we apply to the products that they have."
The building society is also forcing some borrowers away from interest-only mortgages onto repayment products that will cost them thousands of pounds a year more.
Although Manchester's spokesman said the move to decouple its tracker mortgages from Bank Rate affected only a small number of its 5,000-strong mortgage book, experts warned that it was part of an increasing trend among mortgage companies to try to squeeze more profit from their existing customers by raising rates.
"Now that it looks like interest rates are going to remain low for some time, lenders have a new incentive to try to mitigate long-term loss-makers like these mortgages," said Ray Boulger of John Charcol, the mortgage broker. He added that customers should be checking their mortgage offer documents very carefully to make sure that there were no contract clauses that could be invoked to raise rates that appeared to be pegged to low Bank Rate.
Stuart Gregory, a broker from Lentune Mortgages, agreed that lenders were reaching a point where they felt they could no longer absorb the costs of low interest rates. "If there is a chance for them to increase them then they will do it," he said. "They have all reached the point where they have to increase revenue."
More than a million people have already been affected by banks and building societies choosing to raise their standard variable rates (SVRs) in recent weeks. Halifax, Royal Bank of Scotland and the Co-op have all increased SVRs for some customers, citing the increased cost of funding mortgages.
Mr Boulger said most lenders had assumed that mortgage rates would be higher by now, but the crisis in the eurozone meant that the current low-rate environment would drag on for many years. "Lenders are going to do everything they can to push up rates," he said. "They never cease to surprise in the ways they find to treat customers unfairly."
Mr Gregory said many home owners on SVRs or tracker mortgages had a "false sense of security" and might "sleepwalk into problems" if their lender chose to raise rates or change criteria. According to the Council of Mortgage Lenders, more than 2 million people had come off their initial mortgage deals and onto SVRs by summer 2010, and many more will have done the same since then, while mortgage rates have remained at record lows.
Even those with guarantees on their SVRs and trackers stating that they are priced at a certain level above the Bank of England's base rate have fallen foul of small print and seen their interest rates rise. Skipton Building Society had a ceiling on its SVR stating that borrowers would not pay more than 3 percentage points above Bank Rate, but removed this, blaming "exceptional circumstances". The society had a clause written into its mortgage contracts stating that it could remove the ceiling in such circumstances. Customers were given the option to transfer to another lender.
Brokers said other companies might have similar clauses written into their contracts. However, Mr Boulger said customers should check their mortgage offer documents very carefully, especially if they were advised about changes to their SVR or tracker. He said that if your mortgage company wanted to invoke a clause in your contract it should be in the "key facts illustration" (KFI), not in the general small print of the mortgage contract.
If it is not in the KFI, Mr Boulger said, there is precedent that the change will not be allowed. Halifax had a "collar" on its mortgages that meant it could stop its tracker mortgages falling in line with Bank Rate once it hit 2.75pc. However, mention of the collar had been dropped from the key facts document for Halifax mortgages in 2004. The Financial Services Authority (FSA) said that although collars and floors could be legitimate, they needed to be "clear and unambiguous".
Jon Pain, the FSA's then director of retail markets, said in 2008: "While tracker interest rate floors can be a legitimate term of a mortgage, it can only be if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial key facts document and offer document throughout the sales process."
Mr Boulger said anyone who felt this was not the case with any changes to their mortgage rate could take it up with the Financial Ombudsman Service (FOS) if they were not happy with the response from their lender.
He added that even SVR changes where there were no guarantees to the customer that any rises would be pegged to Bank Rate still had to be proportionate. He cited a recent case from the Cheshire Mortgage Corporation (CMC), where the FSA found that a contract term was unfair and asked the lender to change it. The term had allowed CMC to change the interest rate at any time for any reason. "We thought the term was too wide and was unfair because the firm's power was unrestricted," the FSA said. CMC has changed its term to say: "Where the interest rate on your mortgage is variable, we may vary the interest rate at any time. However, we will only vary the interest rate to respond proportionately to changes in our funding costs."
If customers are not happy with the changes that could be made to their terms and conditions, Mr Gregory said they should consider their options now, and check what other mortgages they were eligible for. Many lenders have tightened their criteria for borrowers, meaning that some may remain "mortgage prisoners" stuck on rising rates because they have insufficient equity in their homes or do not meet stricter earnings criteria for other mortgages.
The Council of Mortgage Lenders said recently that it was concerned that new rules from the FSA designed to prevent people from taking out unsustainable mortgages "do not give firms enough flexibility to help borrowers". "This is likely to result in a more limited range of options for a group of consumers whose choices are already restricted because of changing market conditions," it warned.
It also reiterated that there were some rules in place to prevent SVR rises, and added that there were "competitive pressures" helping to keep rates low as well, because creditworthy customers would otherwise remortgage elsewhere.
"Under existing mortgage conduct of business rules overseen by the FSA, lenders are required to give borrowers a month's notice of any increase in rates," the body said.
"A lender's SVR is also subject to the terms and conditions of the mortgage, and to regulations governing unfair terms in consumer contracts. In the past, the FSA has taken action against a number of firms to stop what it has seen as the use of unfair terms and to compensate borrowers affected."
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