Mortgage Lenders May Have to Pay You Interest?
The fall in the last round of interest rates, and its knock-on effect on mortgage rates, has raised the intriguing possibility that some lenders may soon have to start paying interest to some of their mortgage customers.
These are the ones who, in the course of 2007 and even into last year, took out tracker deals that specified the interest rate would be at a level below the Bank of England’s base rate.
These were sold as loss leaders at a time when lenders were still throwing money around to attract new customers.
“The deals were incredibly popular; people snapped them up, they could see they were a good deal,” says Andrew Montlake of mortgage brokers Cobalt Capital.
In July 2007, just before the credit crunch kicked in, there were 83 such deals on offer from 33 different lenders.
Some were set at just 0.01% below bank rate, many were at 0.25% below, but others were a lot more generous.
The Abbey had a deal tracking 1% below bank rate, while the Cheltenham & Gloucester, part of Lloyds TSB, had one mortgage offer at 1.01% below bank rate.
With the possibility that the bank rate may soon fall to 1%, or even lower, some people who took out these deals may think their interest rate could soon turn negative.
And that would mean a monthly refund on their interest payments.
The situation is not clear cut though.
Paul Broadhead of the Building Societies Association (BSA) says it might all depend on what the mortgage contract says.
“It is a possibility, but it depends on the terms and conditions,” he says.
“Some deals have conditions that set an absolute floor below which the interest rate will not fall.
“But the likelihood of repayments happening in a great number of cases is low as many such deals lasted for only a short period of time,” he points out.
Typically, these tracker deals were sold with the discount to the bank rate lasting for just two years, and in a few cases three years.
So some of these deals may be expiring in the next few months anyway.
Even so, not all deals ruled out interest rate refunds.
“Very few had a floor written in – not many stipulated there was one at all,” says Andrew Montlake.
And he says lenders are keeping their heads down on the subject.
“I have spoken to a few lenders about this and none are saying what they will do.”
One, the Cheltenham & Gloucester, has in fact said it will not make any refunds because the wording of its contracts is all about the customers paying the lender, not the other way around.
Bernard Clarke at the Council of Mortgage Lenders (CML) is sympathetic to that view.
“What has been said by some lenders is that there is nothing in the contracts about interest ever being repaid to customers,” he says.
“It seems ridiculous that someone should be paid for taking out a loan,” he adds.
But what if the contract is silent on the possibility of the bank rate falling so low that interest repayments are triggered to the borrower?
If the paperwork says the interest payments will track below bank rate, customers are likely to feel that is what it should do, even if bank rate falls to 0%.
The regulator, the Financial Services Authority (FSA), has been pondering this, but so far has not decided on a definite policy as no lenders or borrowers have yet reached this intriguing position.
“Mortgage floors can be legitimate but the key is what does the contract say, and how clearly and unambiguously is that disclosed to the customer?” says a spokesman.
“The issue will have to be thought through by the lending institutions.”
Ray Boulger of mortgage brokers John Charcol is sceptical that many lenders will be able to rely on their paperwork to fend off customers.
“Many have a clause in the small print but I don’t think that they will stand up if they were not shown in the key facts when the mortgage was arranged,” he argues.
Mortgage Lending Slump Continues Throughout July
The slump in mortgage lending continued throughout July, according to the latest figures from the Council of Mortgage Lenders (CML).
Total lending stood at £24.8bn, up slightly by 5% from June, but still 27% lower than the same period last year.
Lending to homeowners has slumped dramatically in 2008, because the credit crunch has dried up the supply of funds available to banks.
House sales have dropped by 50% this year and will probably fall further.
“While there was a small month-on-month increase in activity, it represented a notable decline from a year ago,” said Bob Pannell of the CML.
“This continues the weaker picture seen in June and points towards the more subdued levels of lending we are likely to see in the second half of 2008,” he added.
The bulk of mortgage lending this year has been to people who are not, in fact, moving house.
Previous figures from the CML have shown that so far in 2008, only 29% of mortgage lending has been to house buyers.
The rest has been to people staying put but moving to new mortgage deals, such as former customers of the Northern Rock, or to people borrowing extra sums against the value of their homes. A marked contrast to the situation year ago.
In the course of 2007, lending to home buyers was a much higher proportion of total mortgage lending, at 43%.
The slump in home buying in the past 12 months is highlighted by the fact that in June this year, loans for home buyers were less than half the number seen in June 2007.
“Even though the base rate has come down by 0.75% since August 2007, those without higher deposits have seen little benefit with many first time buyers effectively shut out of the market,” said Oliver Gilmartin of the Royal Institution of Chartered Surveyors (Rics).
“Despite the prospect of further interest rate cuts as the economy slows sharply into 2009, tighter lending standards look set to stay,” he warned.
Lenders are continuing to shave the interest rates on their mortgage deals, as the cost of funding has come down in the past month or so.
“In the past few weeks, some lenders have returned to the market,” said Andrew Montlake of mortgage brokers Cobalt Capital.
“The Abbey, Nationwide and HBOS have been having a bit of a battle to get more business in,” he added.
Tomorrow the Abbey is cutting the rates it charges on its two-, three- and five-year mortgage deals, for borrowers who can put down a 25% or 30% deposit.
But these are aimed at customers of other lenders who are seeking a better deal, not at people who are moving house or trying to buy a home for the first time.
“They only have two fixed-rate deals for people with deposits of less than 25%,” said Aaron Strutt of mortgage brokers Chase de Vere.
“Their most competitive deals are for people with at least 25% to put down,” he added.
