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Hope for mortgage prisoners after landmark court ruling

Posted 12 April 2017

A new Financial Ombudsman decision means thousands of mortgage holders may now be able to transfer to a cheaper interest rate for their home loan...

For years, thousands of mortgage holders have been prevented from switching to cheaper rates because they failed strict new 'affordability' tests.

Now, a court ruling could be set to help so-called 'mortgage prisoners' move onto cheaper deals. The Lloyds Banking Group has suffered a legal defeat which could help thousands of mortgage holders switch to a better deal.

Britain's biggest lender has been forced to move a borrower onto a lower mortgage rate after they complained that they were being unfairly trapped on Bank of Scotland's standard variable rate (SVR) for more than four years. The Daily Telegraph reports that the ruling “could open the floodgates to complaints from thousands of 'mortgage prisoners'”.

The customer had approached Bank of Scotland to transfer his mortgage onto a cheaper, fixed rate in May 2015 but the lender refused the request. The lender rejected the application because of what it considered an inappropriate plan to repay the interest-only loan. As a consequence, the borrower paid thousands of pounds a year in extra payments and fell into arrears at some points.

However, the adjudicator in the case said this should not have prevented him from accessing a new rate. They said: “This has left him in a worse position, having to pay a higher rate, which hasn’t been in his best interests.”

The Ombudsman ruled that the bank should pay the difference between what the borrower had paid being paying and the lower rate he should have been on since June 2015. As a result the customer will get a lump sum of around £15,000 – depending on what new product he picks – and £350 compensation. Borrowers are not entitled to new rates by right, the Ombudsman said, but lenders must adopt a “treating customers fairly” approach to borrowers making an application.

The customer said: “I want as many people as possible who have been told they cannot switch to a cheaper product because they don’t qualify under affordability, to pick up the phone to the Ombudsman. Too many people don’t stand up for themselves when the bank tells them they don’t qualify for better rates. You need to question it, otherwise you are allowing yourself to be robbed by the banks.

“To pay me my money back, plus £350, is not an incentive for them not to keep doing the same thing to other customers.”

While the legal decision related to one specific case, experts believe that the ruling could have much wider implications across the industry. Chirantan Barua, a banking analyst at Bernstein, the American asset manager, said the Ombudsman’s rejection of the appeal could set a precedent.

He said: “After this ruling, anyone who’s on a rate approaching 4% is going to run to the bank and ask for a repricing. If what happened here can be applied to the whole of Lloyds’ book of business the impact will be significant.”


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