The root of the trouble started before the financial crash, when some landlords opted to pay a higher rate of interest for a year or two on a tracker mortgage, knowing that after a while the rate of interest would fall back to a pre-set margin over the Bank of England base rate. This was quite acceptable to the West Brom until base rates fell to 0.5 per cent, and as the lending market started to thaw after the crash, it found that the cost of wholesale money was making such tracker mortgages uneconomical.
Cynically, the West Brom steered well clear of customers with single mortgages, as these would be protected by the mortgage watchdog, and instead targeted landlords with three or more mortgages, working on the principle that these would not be viewed as consumers. These were charged a full two percentage points on top of what they were already paying. So, at the time, the 1.49 per cent charged became 3.49 per cent overnight. In an attempt to justify this course of action, it referred to a clause buried in the small print that stated that the rate may be varied to reflect market conditions and ensure that its business is carried out prudently, efficiently and competitively. Unhappily, the Financial Conduct Authority took the view that buy-to-let mortgages were not part of its remit. The ramifications could have been significant, with an estimated £2bn in extra payments potentially due.
This seemed to tie things up, but as the details specified by the West Brom were not included in the offer document accompanying any mortgage application, it was argued that they were unenforceable. A legal challenge was brought by Mark Alexander, founder of the online landlord news and discussion forum Property118.com
Having raised over £500,000 from disgruntled landlords, the case was heard in the High Court, which judged in favour of the building society and also refused leave to appeal. However, in May 2015, the Court of Appeal eventually granted leave to appeal, and the case was heard in April this year. At the hearing, the High Court ruling was overturned in favour of Property118's two legal arguments. These were that the West Brom was not legally entitled to vary mortgage interest rates in the absence of a change in the Bank of England base rate which these mortgages track until the term end. It also ruled that the building society was not entitled to call in mortgages unless borrowers were in default.
The whole saga doesn't cast a very favourable light on several other parties, either. The FCA shrugged its shoulders, while several others refused to back the 118 campaign. Mortgage brokers kept quiet, presumably not wishing to upset the building societies, while funding for the legal action was not taken up by conveyancing solicitors, who could possibly have been in the firing line for not identifying the potential ambiguities in the mortgage conditions.
Attention by now will have turned to the Skipton and Manchester Building Societies, and the Bank of Ireland, all of whom imposed a similar surcharge on buy-to-let tracker mortgages. Only the Skipton has released a statement in relation to the West Brom case, in which it sought to justify its action because of an exceptional circumstances provision contained in its mortgage offer. However, the war looks set to continue. Property118 has already launched a crowdfunding campaign to raise £60,000 in order to pursue a similar course of redress against these three, and affected landlords are being urged to contact the action group. And there's plenty of incentive to do so because those landlords may have been paying too much on their mortgages for the last six years.
