West Bromwich Building Society has lost an Appeal Court battle over whether it was right to raise interest rates on tracker mortgages without a rise in Bank of England base rate.
The case sets a precedent over how the wider mortgage market can treat interest rates.
Handing down the judgment today, Lord Justice Hamblen ruled that interest rates on tracker mortgages should only rise with Bank of England base rate, and West Brom cannot require a landlord to repay the mortgage with one month’s notice.
West Bromwich said that clause five of its mortgage conditions document let it raise its interest rates without a base rate rise.
But Hamblen said that West Bromwich’s offer document for the affected mortgages specifically pegged the interest rate was pegged to base rate.
He says: “The lender was thereby promising that the interest rate would be varied in accordance with and so as to reflect changes in that base rate.”
Hamblen also says that borrowers would be hit hard if West Bromwich called in mortgages with one month’s notice.
He says: “For the lender to have the right to require repayment on one month’s notice at will would give him the right to turn the borrower’s contemplated business arrangements on their head.
“In many, if not most, cases the borrower would be required to terminate the letting arrangements and sell the property in order to make the repayment.
“A property which was to be bought so it could be let could, at the lender’s whim, be required to be unlet and sold.
“Buy-to-let becomes sell unlet.”
Lord Justice Leveson and Lady Justice Sharp agreed with Hamblen’s decisions.
The case began when landlord group Property 118 questioned 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 rise meant some landlords saw the interest rate on their mortgages double.
Property 118 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, which led to the Property 118 appeal.