The group are now waiting nervously for the outcome of the case which is due out today. But other borrowers should keep an eye out for the result too as, whatever the judge decides, the outcome will have implications for the wider mortgage market.
To recap, in December 2013 West Brom wrote to about 6,700 borrowers with buy-to-let tracker mortgages to inform them that the interest rate on their loan would rise – despite no change in the Bank of England base rate.
One of those borrowers was property investor Mark Alexander (pictured) who runs the Property118 forum. He grouped together other disgruntled landlords and hired barrister Mark Smith to launch a class action against West Brom. The group finally got their day in court last week.
So what will happen if West Brom wins the case? After the court hearing the building society’s solicitor Raymond Cox QC said that if other people have tracker mortgages under the same terms (i.e. a clause that allows the lender to increase the rate regardless of a change in bank rate), then other mortgage lenders could follow West Brom’s lead.
Alexander claims this could mean ruin, not just for him and other landlords, but owner-occupiers too.
“There are an estimated 1m tracker rate mortgages in the UK. They were very popular in the decade prior to the credit crunch,” he said, “I have other tracker mortgages with other buy-to-let lenders and I am fearful that if they follow suit I will be bankrupt and all my hard work to generate money to invest for my retirement will be undone. Many homeowners with tracker rate mortgages could lose their homes.”
Alexander points out that so far industry regulators have let lenders hike tracker, and other variable, rates unfairly. He pointed to the Bank of Ireland upping tracker rates for more than 14,000 customers in 2013 and Skipton building society reneging on its promise that its standard variable rate would be capped at 3% over the Bank of England base rate.
“The worst case scenario I suppose is that if I lose my case it will speed the tracker mortgage margin rate hike process amongst other lenders which I see as being inevitable,” he said. “I also worry about the impact on tenants if my case is unsuccessful. The ramifications of all lenders being able to hike up tracker mortgage interest rates on a whim could no doubt result in mass defaults of payments and inevitable repossessions of the quality rental property which has been funded by buy-to-let mortgage lenders.”
Others might argue that landlords would simply increase rents to cover their higher costs – a move that would hit tenants hard at a time when campaigners say rents are already too high.
And if Property118 win the case? Alexander says he’d have “saved the livelihoods over a million homeowners and people fortunate to have been able to invest into much needed quality rental property”.
However, David Hollingworth of broker London & Country disagrees with Alexander that other lenders would follow West Brom’s lead if the building society wins the case
“No matter what the outcome of the case I don’t think that borrowers need to worry that lenders will be rushing to alter tracker margins. Most deals have remained firmly pegged to base rate despite it plummeting to its low almost six years ago. Only in extraordinary situations have we seen lenders rely on these terms,” he said.
Hollingworth added that we are still seeing some very competitive tracker rates coming to market which suggests that lenders are not overly anxious about the result of this case. He says that adding in terms to give the lender added flexibility won’t serve lenders well in attracting customers in a competitive market.
Mark Harris, chief executive of SPF Private Clients, is less confident than Hollingworth about the impact of a West Brom win. He thinks landlords have most to fear.
“If West Brom wins this case, it is unlikely that lenders will, in a single swoop, increase their mortgage rates. However, some lenders will probably use the opportunity to do so, assuming they had the same ‘Armageddon’ clause,” he says,
“Investment mortgages could be targeted as they do not have the same regulatory protection afforded to residential borrowers.”
