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Abbey offset conditions concern customers

The BBC has today been reporting about Abbey withdrawing borrowing facilities from some customers with an offset mortgage, which Abbey call a flexible mortgage.

This came about as a result of Abbey sending out letters last month to about 4,000 offset customers advising them that their maximum facility was being reduced because of a fall in the value of their property.

This caused some borrowers to worry that further falls in the value of their property might prompt Abbey to demand repayment of any borrowing which then exceeded 90% of the new valuation.

The way Abbey’s offset mortgage works is that borrowers can have a facility of up to 90% LTV, obviously subject to income, and unlike some other offset mortgages if borrowers don’t initially want the maximum available they can have a facility for the difference between the initial advance and 90% LTV.

With most mortgages if a borrower wants to increase their mortgage after completion they would apply for a further advance, which the lender would assess on the basis of the situation at the time, including the then valuation and borrower’s current status.

The convenient availability of additional funds at the mortgage rate is a key feature of offset mortgages and for many borrowers will be a material fact in choosing that particular mortgage.

Therefore it is important that borrowers understand any restrictions their lender can impose on the availability of those funds and equally importantly also how they can avoid the restrictions.

Offset mortgages are more complicated than ordinary mortgages and so it is particularly important for borrowers considering one to get advice from a good independent mortgage broker such as John Charcol.

Every quarter Abbey reviews the balances available to their offset mortgage customers by doing a computer valuation of house prices. If the total facility for any customer would exceed 90% LTV based on that valuation they reserve the right, as stated in the mortgage terms and conditions [No 19.4 (a)], to withdraw any “available balance” over the 90% LTV limit.

The letters Abbey sent out last month followed lower valuations and its decision to exercise that right.

Abbey’s terms and conditions (No 19.6.) also allow it to require any customer whose LTV now exceeds 90% as a result of a reduced valuation to bring the LTV down to 90% within 3 months.

It has now confirmed it has no current intention of enforcing this condition, but it appears this decision was only taken after some borrowers who received the original letter expressed serious concerns.

It would have avoided a lot of unnecessary worry for their customers if Abbey had given more thought to the implications of its letter before sending it out.

They could then have made the decision not to currently enforce this clause and included words to that effect in the letter.

But it may be that it did consider this and had intended trying to enforce that clause but only realised what a PR disaster it would be after receiving complaints from some customers.

In my view it is in any case doubtful whether the clause is enforceable, particularly after comments last week from Jon Pain, a managing director at the Financial Services Authority, at the Council of Mortgage Lenders’ annual conference.

In an attack on collars Pain said collars were not enforceable if details were not included in the key facts illustration, which must be given to customers before they apply for a mortgage.

There is no reference in Abbey’s KFI to customers having to repay any of their mortgage if their property value falls and as this is an even more material fact than the imposition of a collar if the FSA is going to be consistent it would have to outlaw this clause in Abbey’s terms and conditions.

Thus the only current change to their situation for Abbey Offset mortgage customers who have drawn down an amount which results in their current mortgage being in excess of 90% is that any unused facility will be withdrawn.

This may be a problem for some of these borrowers, and others whose current balance is below 90% but have had their facility reduced, if they had plans for some or all of the funds they thought would be available, perhaps to buy a car or do some home improvements.

Although, for the reasons given above, I think it very unlikely Abbey will try to enforce repayment of any borrowing in excess of 90%, it is worrying for borrowers to have this threat hanging over them.

Until recently these problems have not affected many borrowers but in the current market it will affect an increasing number.

At John Charcol we normally advise clients with an offset mortgage to make any extra payments into the linked savings account because such amounts will then always be available to withdraw and it will be easier to access the funds.

Also with some lenders, e.g. Intelligent Finance, any money borrowed back via the mortgage rather than from the savings account incurs a higher rate of interest and possibly an admin charge.

If a customer has funds in their linked savings account but the mortgage balance is in excess of 90% LTV Abbey will not transfer any of the savings balance to the mortgage account and so the savings will continue to be available.

But if a borrower has made some overpayments directly into the mortgage account they may not be able borrow back those funds if the property has fallen in value.

Any borrowers who want to guarantee access to all or some of their current unused facility, but are worried that future valuations might reduce the amount available, could draw down some or all of the available facility and place it in the linked deposit account.

Abbey always collects the monthly mortgage payment on the basis of the gross mortgage amount and so this will result in higher monthly payments, but the surplus over the net amount due is used to reduce the mortgage balance and so the customer doesn’t lose out.

Abbey’s offset accounts are all trackers, although a few started off with a 6 month fixed rate.

Most of their offset borrowers will be on a lifetime rate of around Bank Rate + 0.5% and from January 2009 will therefore be paying only about 2.5%, with the probability of an even lower rate shortly after.

Therefore, unless they have some more expensive debts, in which case these should be repaid first, the spare cash resulting from current low mortgage payments should be used to add to the funds in their linked savings account, thus both reducing their net mortgage balance and future interest payments.

An even better alternative for borrowers with a low tracker rate may be to invest the spare cash in a mini cash ISA as the best offer a higher tax free return than the mortgage rate.

Likewise, if the mortgage is in joint names and one borrower is a non taxpayer, investing the spare cash in the name of the non taxpayer should also provide an arbitrage profit as the best savings rates currently available are well above bank rate plus 0.5%.

Indeed it might even be worth drawing down some or all of any unused facility on the mortgage account and investing it in this way. If the best savings rates subsequently fall below the mortgage rate the savings should be transferred to the linked offset savings account.

The above comments assume, of course, that the borrower is not in arrears.

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