Would Mortgage Lenders Renege on Their Promises?

In the UK there are currently millions of home loan borrowers who have tracker deals. These are deals where the interest rate they pay on their mortgage is linked to follow the Base Rate by a certain percentage over that base rate. So if the Base rate falls the mortgage rate paid falls by the same amount and vice versa. These deals very clearly pass on any falls in base rate to the customer but, unlike fixed rate deals, can also go up.

Clearly, with Bank Base Rates at historically low levels these millions of borrowers are getting a good deal. Some with lifetime tracker deals set before the economic slump are likely to be on exceptional deals. And these deals are guaranteed – aren't they?

Well, earlier this year the Bank of Ireland took the decision to invoke a clause in the small print of its mortgage contracts and raisethe lending rate to which tracker mortgages are linked. If the same were to happen in the UK then anyone with a tracker mortgage deal could see their monthly repayments rise substantially.But how likely would this be to happen?

Base rate cut could force more lenders to invoke ‘exceptional circumstances’ clause Many large mortgage lenders have guaranteed that their lending rate will always be closely linked to the Bank of England Base rate. For instance, anyone with aNationwide mortgagehavea guarantee that thebuilding societywill not charge more than two percentage points above the Bank Rate. Other UK building societies have made a similar commitment to their borrowers.

However, given the Bank of Ireland’s decision to state ‘exceptional circumstances’ and increase their rates, there is understandable anxiety that other banks may do the same. Many tracker deals contain clauses allowing lenders to renege on their guarantees and to increase the margin at which they ‘track’ the Bank Rate.

Any attempts by banks to raise rates could be successful if they can prove that the current economic climate constitutes ‘exceptional circumstances’. However, banks and building societies would then have to face the negative press and potential repercussions of such a decision.

The pressure on some banks to invoke these clauses could come if the Bank of England decides to cut the Base rate further, although this is now increasingly seen as an unlikely event. With millions of large mortgages on tracker deals, any reduction in base rate could be the final straw. However, some lending institutions have confirmed that they would not renege on the guarantee provided to existing mortgage clients and have no plans to alter the terms of their tracker mortgages.

The concept of tracker mortgages was to give mortgage borrowers an effective guarantee that they would never pay more than a certain percentage over or under the Base Rate according to London mortgage broker Enness Private Clients. They were intended to be clear deals and to ensure interest rate cuts were passed on to borrowers. Anyfailure to comply with these guarantees would remove high value mortgage borrowers certainty and peace of mind and would definitely cause negative press for any lending institution concerned.