A landmark ruling which saw Britain’s biggest lender, Lloyds Banking Group, suffer a major defeat, could be set to open the floodgates to thousands of complaints from customers who have been called “mortgage prisoners”.
The Financial Ombudsman Service delivered the final verdict in the case against Lloyds – which also owns the Bank of Scotland and Halifax.
In the case a customer had been stuck on the Bank of Scotland’s SVR (Standard Variable Rate) in excess of four years. The customer ended up paying upwards of £1,000.00 per year in extra payments, with the bank refusing applications to move to a fixed-rate mortgage deal, which would have been cheaper.
In recent years fixed mortgage rates have fallen, coming into line with the base rate provided by Bank of England. However the SVR’s provided by major lenders have remained at a flat rate or in certain cases increased. The financial crisis meant that thousands of customers who took out mortgages before the crisis, were unable to switch to a fixed-rate deal, when the existing ones finished.
Lenders claimed that the Mortgage Market Review, which was introduced following the financial crisis, meant that many customers failed the stricter affordability tests. This then led to a scenario in which customers otherwise known as mortgage prisoners were informed they were unable to move to the cheaper rates.
In January 2017 it was reported that the Ombudsman had ordered the Bank of Scotland to allow the customer to move from the SVR, which had been as high as 3.99%, to a new fixed-rate deal.
The payments made on interest-only mortgage, which was taken out in 2008, came to £1,300 a month.
Had the customer been allowed to move to a fixed-rate mortgage deal during May 2015, when he made the original request, his payments would have been cut in half. However the Bank of Scotland rejected the application as they felt the plan to repay the interest-only loan was inappropriate. In the case the adjudicator said this should not have prevented the customer accessing a new rate.
The bank were then ordered to pay the difference between what the customer had been paying and what he would have paid on the lower rate he should have received from June 2015.
The final ruling means the customer will receive a sum in the region of £15,000 (depending on the new product he selects) along with £350 in compensation. Borrowers will not be entitled to the new rates by right, but the Ombudsman added that the lenders should any customers making an application should be treated fairly.
However experts are predicting that the implications for Lloyds and other major lenders could be significant. Chirantan Barua, banking analyst at the American Bernstein, has claimed the denial of the appeal by the Ombudsman will set a big precedent.
Barau has said: “If what has happened in this case can be applied to the whole book of business used by Lloyds, the impact will be significant. Anyone on a rate approaching 4% will run to the bank and ask for their mortgage to be repriced.”