Consumer Rights: Get-out clause can make a nonsense of your tracker mortgage
Check the small print on your mortgage agreement or risk facing an unpleasant surprise
Saturday 05 October 2013
When is a tracker not a tracker? When your lender decides to use a get-out clause in your contract it seems.
Landlords don't always elicit sympathy when things go wrong, but in recent days those who have buy-to-let loans with the West Bromwich Building Society have had a lot of support in light of their lender's decision to cane them with a big interest-rate hike.
A total of 6,700 buy-to-let landlords with multiple properties – customers of the West Bromwich – have been told their mortgage rates will increase by 2 per cent from 1 December despite the fact they have tracker mortgages.
Some have had their loans for six or seven years completely unaware that they were sitting on a potentially ruinous clause in the small print.
I always thought a tracker did what it said in the contract. It appears to be designed to track the Bank of England base rate plus a margin set at the time a borrower takes out the mortgage. The idea seemed to be – and indeed the West Brom's website still suggests – that you know exactly where you stand because under the deal your repayments only rise or fall if the Bank's base rate rises or falls.
So how can these tracker rates be going up? The Bank's base rate hasn't risen. It's been at 0.5 per cent for more than four years. Yet nearly 7,000 customers are facing interest-rate rises which could, in some cases, double their repayments. Someone with a £200,000 loan could pay an extra £330 a month. Some mistake surely?
It seems that many lenders are losing money on these tracker deals. The problem is the margin they charge over and above the Bank base rate. Many set their margins too low all those years ago when times were good and now they're looking for ways around the problem.
Hey presto – the get-out clause comes into its own. The West Bromwich claims there is a clause in the small print of its contracts that allows it to increase its margins. It stands to make £19m out of this move.
Understandably, customers are outraged and planning legal action. The only alternative is to get advice now and see if you can get a better deal elsewhere before the rate hike hits you in December.
West Bromwich customers aren't the only ones falling foul of the small print. Earlier this year the Bank of Ireland hiked rates for 13,500 tracker-mortgage borrowers from base rate plus 1.75 per cent to base rate plus 4.49 per cent for buy-to-let deals, and base rate plus 2.49 per cent for homebuyers with further increases this month. Howls of protest followed and the bank did retreat in some cases.
Residential borrowers can complain to the Financial Ombudsman Service but buy-to-let investors aren't protected by the same consumer regulations. If they want to hit back they'll have to take legal action. But that's expensive unless they band together, gather up enough money for a test case, and win it.
Mortgages of all types look like becoming more expensive despite the low Bank base rate.
New buy-to-let borrowers with Virgin Money will have to pay more after their fixed rate or tracker period ends. Previously, they would have reverted to the lender's standard variable rate of 4.79 per cent, but now they will have to pay a new buy-to-let variable rate which is currently 4.99 per cent.
Several lenders have increased the cost of fixed-rate mortgages for new borrowers while tracker rates could rise across the board, even if the base rate stays at 0.5 per cent. Although residential mortgages and loans from banks, building societies and credit companies are regulated, don't assume there aren't pitfalls in the small print.
You could face big penalties if you want to pay a loan back early, increased interest rates if you miss a payment, an obligation to pay the total amount of a loan plus all the interest if you miss one payment.
If you do miss a killer clause you've signed up to your only way out might be to prove in court that the clause was unfair. The courts are your ultimate consumer protection but the cost of taking a case can be too much for most people.
Q: I had a fire in my kitchen two weeks ago and have been trying to get some money from my insurance company to have it replaced, but they seem to want to pay me less than even a modest kitchen would cost. They say the house wasn't insured for its full value because I've done some improvements so they won't pay me the full amount of the claim. KC, Bradford
A: People often do wonderful things to their homes: new rooms, beautiful bathrooms, extensions, but don't think to tell their insurance company that the property has been improved. Your home should be insured for the full cost of rebuilding it if it had to be knocked down and replaced on the same site. If you do improvements they increase that rebuild cost. If the replacement cost goes up but you don't increase your insurance cover, the policy you've got will no longer pay out enough to fully replace your home. This seems to be what's happened in your case and the insurance company is fully within its rights to pay less than the full amount. You may have to borrow the extra money or perhaps put in a less-expensive replacement kitchen. Some types of improvements might even make the policy invalid and leave you unable to claim at all. In your case you're lucky the policy is still valid.
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