The future of tracker mortgages hangs in the balance pending the outcome of the long-running court case involving landlords challenging rate hikes by West Bromwich Building Society.
Whichever side wins, there will be a legal precedent set which will affect whether lenders can raise their interest rates without a rise in Bank of England base rate.
Landlord group Property 118 is fighting a decision by West Brom to increase its tracker rate in September 2013 without a base rate rise.
At the time the lender told 6,700 landlords it would increase rates from 1.49 per cent to 3.49 per cent from 1 December 2013. The borrowers all had loans with West Bromwich Mortgage Company, its now defunct specialist lending arm.
The lender said the increase reflected the rising cost of mortgage funding, and the firm had no choice but to raise rates. West Brom said the changes were allowed under the terms of their mortgage agreements.
The tracker mortgages had been advertised as products that would mirror base rate, but the lender argued its terms and conditions allowed it to vary interest rates according to market conditions.
The rise meant some landlords saw the interest rate on their mortgages double.
Property 118 said the rise was unfair as base rate had not risen. The body then launched legal action against West Brom in the High Court in November 2013.
Separately, angry landlords took their cases to the Financial Ombudsman Service. However the FOS threw the cases out in November 2014, saying the lender was allowed to raise its rates.
Judge Nigel Teare of the High Court then sided with West Brom in January 2015, saying the lender was allowed to increase its rates to handle changing market conditions.
Teare threw Property 118’s case out, saying West Brom could vary its interest rates without a base rate rise to reflect market conditions and was also allowed to call in loans with one month’s notice.
But Property 118 won the right to appeal and wants to overrule Teare’s earlier judgement.
The landlord group also wants a court order to force West Brom to allow affected borrowers to go back to paying interest rates at base rate plus 1.99 per cent.
Property 118 also wants the appeal to scrap West Bromwich’s contested right to call in its loans with one month’s notice, and also want the lender to repay all its borrowers’ overpaid amounts, with interest.
The claimant’s pre-trial argument submitted to the court slammed Teare’s original judgment.
It said: “His conclusion runs counter to, and fundamentally undermines, the commercial purpose, object and intent of a tracker mortgage. It rendered the mortgage materially indistinguishable from one pursuant to which the lender has absolute freedom to specify any variable rate, subject only to considerations of honesty and reasonableness.”
In the Court of Appeal last week, QC Michael Ashcroft, acting for Property 118, repeated West Brom should not expect to be able to raise its rate unless base rate rose too.
He said: “The tracker element is effectively denuded if there’s absolute discretion as to what to do with the premium at any time.”
Ashcroft added most people understood tracker mortgages to only rise with base rate, and argued West Brom wrong to think other definitions were acceptable.
Lord Justice Brian Leveson, leading the panel of three judges, said the case would have an impact on the wider mortgage market due to the way it would affect principles of interest rates.
Leveson said: “The question is whether it is permitted to be varied, other than changes to Bank of England base rate?”
Raymond Cox QC, acting for West Brom, said the original High Court judgment on the case was accurate and should be stuck to.
He said: “We say the judge was right on the law for the reasons he gave. His judgment deals with it quite succinctly.”
Cox said the lender needed to be able to retain the right to vary its terms due to the length of the mortgage contracts.
But Leveson challenged this.
He said: “The borrowers may also say ‘we need to have some certainty to conduct our business affairs appropriately’.”
The defending lawyer said the outcome of the appeal would have a knock-on impact on the nature of mortgage interest.
Cox said: “If they are right then it would mean we cannot vary any of the interest rate provisions.”
The appeal case also questioned West Brom retaining the right in its mortgage conditions contract to order its customers to repay loans and charges in full with one month’s notice.
Property 118 says that West Brom’s mortgage offers contradicted the lender’s right to call in its loans at short notice.
The claimant’s pre-trial argument said: “No reasonable reader could have thought that the mortgage contract entitled the lender to call in the full loan amount plus interest and any unpaid charges at any time, even on the first day after drawdown, merely by giving one month’s notice and absent any default by the borrower.”
In the Court of Appeal, Ashcroft said this could leave borrowers unable to remortgage on their original terms, if at all.
But Cox said the one-month cancellation also applied to borrowers, giving them flexibility.
The final ruling on the case is not expected for several weeks.